-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AlXuGd97AJB73eeQVrAU3JhA62ABCfcFWUD6hCNWQLb/Kf8NoiarrV3UqMqS8ncx 69CDLoKYgkkXjkmWPU+s6Q== 0000950116-00-000695.txt : 20000331 0000950116-00-000695.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950116-00-000695 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENNSYLVANIA REAL ESTATE INVESTMENT TRUST CENTRAL INDEX KEY: 0000077281 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 236216339 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06300 FILM NUMBER: 586861 BUSINESS ADDRESS: STREET 1: THE BELLEVUE STREET 2: 200 S BROAD STREET CITY: PHILADELPHIA STATE: PA ZIP: 19102 BUSINESS PHONE: 2155429250 MAIL ADDRESS: STREET 1: THE BELLEVUE STREET 2: 200 S BROAD STREET CITY: PHILADELPHIA STATE: PA ZIP: 19102 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-K ----------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________to _______________ Commission File No. 1-6300 PENNSYLVANIA REAL ESTATE INVESTMENT TRUST (Exact name of Registrant as specified in its charter) Pennsylvania 23-6216339 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) The Bellevue 19102 200 S. Broad St. (Zip Code) Philadelphia, Pennsylvania (address of principal executive office) Registrant's telephone number, including area code: (215) 875-0700 Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered ------------------- ----------------------------------------- (1) Shares of Beneficial Interest, par value $1.00 per share New York Stock Exchange (2) Rights to Purchase Shares of Beneficial Interest New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Trust was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K |X|. The aggregate market value, as of March 20, 2000, of the voting shares held by non-affiliates of the registrant was $198,779,441. (Aggregate market value is estimated solely for the purposes of this report and shall not be construed as an admission for the purposes of determining affiliate status.) On March 20, 2000, 13,343,821 Shares of Beneficial Interest, par value $1.00 per share (the "Shares"), of Pennsylvania Real Estate Investment Trust were outstanding. Documents Incorporated by Reference The Registrant's definitive proxy statement for its May 10, 2000 Annual Meeting is incorporated by reference in Part III hereof. PENNSYLVANIA REAL ESTATE INVESTMENT TRUST -------------------- ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 ------------------- TABLE OF CONTENTS PART I
Page Item 1. Business............................................................................................1 Item 2. Properties.........................................................................................22 Item 3. Legal Proceedings..................................................................................23 Item 4. Submission of Matters to a Vote of Security Holders................................................................................23 PART II Item 5. Market for Our Common Equity and Related Shareholder Matters.......................................24 Item 6. Selected Financial Data............................................................................26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................................................27 Item 7A. Quantitative and Qualitative Disclosure About Market Risk..........................................39 Item 8. Financial Statements and Supplementary Data........................................................39 Item 9. Disagreements on Accounting and Financial Disclosure...............................................39 PART III Item 10. Trustees and Executive Officers of the Trust.......................................................39 Item 11. Executive Compensation.............................................................................40 Item 12. Security Ownership of Certain Beneficial Owners and Management.....................................40 Item 13. Certain Relationships and Related Transactions.....................................................40 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................40
Item 1. Business Pennsylvania Real Estate Investment Trust, a Pennsylvania business trust ("PREIT"), conducts substantially all of its operations through PREIT Associates, L.P., a Delaware limited partnership. As used in this report, unless the context requires otherwise, the terms "Company," "we," "us" and "our" includes PREIT, PREIT Associates and their subsidiaries and affiliates, including PREIT-RUBIN, Inc. (formerly The Rubin Organization, Inc.), a commercial property development and management firm in which PREIT owns 95% of the economic interests in the form of non-voting common shares. The Company PREIT, which is organized as a business trust under Pennsylvania law, is a fully integrated, self-administered and self-managed real estate investment trust, founded in 1960, which acquires, develops, redevelops and operates retail and multifamily properties. We own interests in 22 shopping centers containing an aggregate of approximately 8.3 million square feet, 19 multifamily properties containing 7,242 units and five industrial properties with an aggregate of approximately 549,000 square feet. We also own interests in six shopping centers currently under development, which we expect to contain an aggregate of approximately 3.1 million square feet upon completion. Three of the development properties are under construction currently and we anticipate that the remaining three development properties will be completed during the year 2001. We cannot assure you that all six development properties will be completed successfully. We also provide management, leasing and development services to 17 retail properties containing approximately 7.7 million square feet, 7 office buildings containing approximately 1.9 million square feet and 3 multifamily properties with approximately 1.4 million square feet for affiliated and third-party owners. Recent Developments In the first quarter of 2000, we and an unrelated third-party formed a partnership and purchased the Willow Grove Park shopping center in Willow Grove, Pennsylvania for approximately $140 million. Upon completion of certain requirements, including the funding of an expansion of the shopping center, our current 0.01% interest in the partnership that owns the shopping center will increase to a subordinated 50% interest. In the first quarter of 2000, we purchased, for $11 million, including the assumption of debt, our partner's 35% interest in the Emerald Point Multifamily Community. The property is now 100% owned and operated by us. -1- Our Structure PREIT Associates holds substantially all of our assets. As the sole general partner of PREIT Associates, we have the exclusive power to manage and conduct PREIT Associates' business, subject to limited exceptions. As of December 31, 1999, we owned approximately 90.7% of PREIT Associates. We anticipate that all acquisitions of interests in real estate will be owned, directly or indirectly, by PREIT Associates. Below is a diagram of our ownership structure, including PREIT Associates and PREIT-RUBIN, as of December 31, 1999. +--------------------------+ | Pennsylvania Real Estate | | Investment Trust(1) | +--------------------------+ | 90.7% | | | +------------+ | | Minority | | | Limited | | | Partners(2)| | +------+-----+ +----------------+ | | 9.3% | Employee Stock | | | | Bonus Plan | | | +----------------+ | | | 5% (voting) | | | +-----------+------------+-+ | +---------------| PREIT Associates, L.P. | | | +-----------+--------------+ | | | | | 95% (non-voting) | | | | +-----------------+ | | PREIT-RUBIN, | | | Inc. | | +-----------------+ | | | | +-------------------------+ | 52 Properties(3) | +-------------------------+ - ---------------------- (1) Sole general partner of the PREIT Associates. Of our 90.7% interest in PREIT Associates, we hold 99.3% of our units of limited partnership interest in PREIT Associates ("Units") as a Class A Limited Partner and 0.7% of our Units as the sole general partner. (2) Includes an aggregate of 826,258 Units, 5.6% of the aggregate of all Units outstanding, owned by the persons who were shareholders and affiliates of The Rubin Organization before our acquisition of The Rubin Organization, including Ronald Rubin, PREIT's Chief Executive -2- Officer and one of its Trustee. Under the terms of our acquisition of The Rubin Organization, these individuals have the right to receive up to 637,500 additional Units in respect of their former ownership interest in The Rubin Organization, depending on our adjusted funds from operations over the three year, nine month period commencing on January 1, 1999, and also to receive additional Units in respect of their interest in three of the development properties and a completed joint venture project we acquired rights to as part of the acquisition. Although not yet issued, the former shareholders and affiliates of The Rubin Organization are entitled to 167,500 units for the 12 month period from January 1, 1999 through December 31, 1999. (3) Interests in some of these properties are (i) owned directly by us under arrangements in which the entire economic benefit of ownership has been pledged to PREIT Associates, or (ii) owned directly by PREIT Associates. PREIT Associates' interest in these properties ranges from 40% to 100%. The Existing Retail Properties At December 31, 1999, we had interests in 22 retail properties containing an aggregate of approximately 8.3 million square feet. PREIT-RUBIN currently operates fourteen of these properties, of which twelve are wholly-owned and two are joint ventures. The remaining eight joint venture retail properties are managed by our joint venture partners, or an entity we or our joint venture partners designate, and in most instances a change in the management of the property requires the concurrence of both partners. Eleven of the 22 retail properties (containing an aggregate of approximately 4.9 million square feet) are located in Pennsylvania, three (containing an aggregate of approximately 0.5 million square feet) are located in Florida, two (containing an aggregate of approximately 1.0 million square feet) are located in Maryland, two (containing an aggregate of approximately 0.3 million square feet) are located in Delaware, two (containing an aggregate of approximately 0.8 million square feet) are located in South Carolina, and one is located in each of Massachusetts and New Jersey (containing an aggregate of approximately 0.8 million square feet). The following table presents information regarding the existing retail properties, as of December 31, 1999: -3-
Total Leased Year Built Total Owned GLA(3) Percent or Square Square Square Percent Real Property Location Owned* Renovated(1) Feet(2) Feet(2) Feet eased(4) Anchors - ------------- -------- ------ ------------ ------- ---- ---- -------- ------- Lehigh Valley Allentown, PA 50% 1977/1996 1,051,253 698,900 685,054 98% JC Penney, Strawbridges, Macy's Mall The Court at Langhorne, PA 50% 1996 704,486 456,862 456,862 100 Dicks Sporting Goods, Best Buy, Oxford Valley Pharmor, HomePlace, The Home Depot, BJ Wholesale Club North North Dartmouth, 100% 1971/1987 637,866 637,866 552,384 86.6 JC Penney, Sears, Ames, General Dartmouth Mall MA Cinema Whitehall Mall Allentown, PA 50% 1964/82/98/99 530,096 530,096 516,321 97.4 Sears, Kohl's, Bed, Bath & Beyond Magnolia Mall Florence, SC 100% 1979/1992 566,771 566,771 548,567 96.8 JC Penney, Sears, Belk, Rose's Laurel Mall Hazleton, PA 40% 1973/1995 558,801 558,801 528,579 94.6 Boscov's, Kmart, JC Penney Palmer Park Easton, PA 50% 1972/1982 456,879 456,879 425,624 93.2 The Bon-Ton, Boscovs Mall Forestville S/C Forestville, MD 100% 1974/1983 217,934 217,934 99,078 45.5 Ames, US Postal Service, Super Fresh Mandarin Jacksonville, FL 100% 1986 238,861 215,013 215,013 100 Walmart, Upton's, Carmike Corners Cinemas Springfield Springfield, PA 50% 1963/1997 268,500 122,831 93,946 76.5 Target, Bed Bath & Beyond Park I & II(5) Rio Mall Rio Grande, NJ 60% 1973/1992 165,583 165,583 159,145 96.1 Kmart, Staples Crest Plaza S/C Allentown, PA 100% 1959/1991 157,370 157,370 107,986 68.6 Weis Market, Eckerd Drug Store Park Plaza S/C Pinellas Park, FL 50% 1963/1983 155,528 155,528 144,886 93.2 Eckerd Drug Store, Ace (6) Hardware, Publix Supermarket South Blanding Jacksonville, FL 100% 1986 106,857 106,857 100,357 93.9 Food Lion, Scotty's Village Ingleside Thorndale, PA 70% 1981/1995 101,271 101,271 101,271 100 Kmart Center Festival at Exton, PA 100% 1991 144,952 144,952 134,375 92.7 Sears Hardware, Clemens Exton Northeast Philadelphia, PA 89% 1998 479,498 479,498 298,696 62.3 Home Depot, Dicks Sporting Tower Center Goods (7) Prince Hyattsville, MD 100% 1959/1990 744,911 744,911 624,717 83.9 GC Murphy, JC Penney, Hechts Georges Plaza Red Rose Lancaster, PA 50% 1998 463,042 263,452 261,291 99.2 Weis Market, Home Depot Commons Valleyview S/C Wilmington, DE 100% 1999 55,798 55,798 52,598 94.3 Genuardis Florence Florence, SC 100% 1991 197,258 197,258 107,318 54.4 Tags Store, Goodys Family Commons S/C Clothings Christiana Newark, DE 100% 1998 302,439 302,439 293,839 97.2 Costco, Dicks Sporting Goods Power Center Phase I --------- --------- --------- ----- Total/Weighted Average 8,305,954 7,336,870 6,507,907 88.7% (22 Properties) ========= ========= ========= =====
- ----------------------- * By PREIT Associates; we own approximately 90.7% of PREIT Associates. (1) Year initially completed and, where applicable, the most recent year in which the property was renovated substantially or an additional phase of the property was completed. (2) Total Square Feet includes space owned or ground leased by anchors. Owned Square Feet and Percent Leased excludes such space. (3) GLA stands for Gross Leasable Area. (4) Percent Leased is calculated as a percent of Owned Square Feet for which leases were in effect as of December 31, 1999. (5) With respect to Phase I, we have an undivided one-half interest in one of three floors in a free standing department store. (6) We sold our interest to our joint venture partner in January 2000. -4- (7) We expect to acquire the remaining 11% ownership interest during the first quarter of 2002. A portion of the center is currently under development. The following table presents information regarding each anchor in the existing retail properties: Anchor and Square Footage as of December 31, 1999
# Anchor Square Footage Square Footage Total Square Anchor Name(1) Stores Owned By Anchors Leased By Anchors Footage Occupied - ----------- -------- ---------------- ----------------- ---------------- Ames 2 - 166,539 166,539 Bed, Bath & Beyond 2 - 91,975 91,975 Belk 1 - 115,793 115,793 Best Buy 1 - 59,620 59,620 BJ's 1 116,872 - 116,872 Boscov's 2 - 375,110 375,110 Circuit City 2 - 64,733 64,733 Clemens Markets 1 - 40,000 40,000 Costco 1 - 140,814 140,814 Dick's Sporting Goods 3 - 158,101 158,101 Food Lion 1 - 29,000 29,000 Genuardi's 1 - 47,500 47,500 Goody's Clothing 1 - 29,940 29,940 Hecht's 1 - 195,655 195,655 Home Depot 3 265,310 136,633 401,943 Home Place 1 - 54,096 54,096 IGA* 1 - 21,700 - J.C. Penney 5 187,659 403,147 590,806 K-Mart 3 - 334,858 334,858 Kohl's 1 - 81,785 81,785 Macy's 1 - 212,000 212,000 Pet Smart 3 - 81,504 81,504 Pharmor 1 - 45,712 45,712 Publix 1 - 33,490 33,490 Rose's 1 - 53,200 53,200 Scotty's 1 - 44,921 44,921 Sears Hardware 1 - 20,425 20,425 Sears 3 - 412,454 412,454 Staples 1 - 20,000 20,000 Strawbridges 1 164,694 - 164,694 Super Fresh* 1 - 25,622 - Tags Stores 1 - 40,000 40,000 Target 1 145,669 - 145,669 The Bon Ton 1 - 122,125 122,125 Upton's* 1 - 51,800 - Walmart 1 23,848 58,074 81,922 Weis Market 2 65,032 45,000 110,032 -- ------- --------- --------- Total 56 969,084 3,813,326 4,683,288 == ======= ========= =========
- --------------------- (1) Actual tenant may be an affiliate of the entity listed. * Leased, but currently vacant -5- The following table presents, as of December 31, 1999, scheduled lease expirations of malls and shopping centers for the next 10 years, assuming that none of the tenants exercise renewal options or termination rights:
Average Base Rent % of Total Annualized Approximate Per Square Leased GLA (1) Number of Base Rent Square Feet Foot of Represented By Year Ending Leases of Expiring Of Expiring Expiring Expiring December 31 Expiring Leases Leases Leases Leases ----------- --------- ----------- ----------- ---------- -------------- 2000 79 $2,971,007 255,092 $11.65 3.97% 2001 84 4,611,601 612,309 7.53 9.52% 2002 71 3,268,485 214,481 15.24 3.34% 2003 66 4,176,674 325,595 12.83 5.06% 2004 64 5,089,944 460,660 11.05 7.16% 2005 41 3,806,623 273,374 13.92 4.25% 2006 52 5,831,277 625,802 9.32 9.73% 2007 43 5,743,106 689,447 8.33 10.72% 2008 41 4,811,505 627,878 7.66 9.76% 2009 41 4,981,825 281,634 17.69 4.38% -- --------- ------- ----- ----- Total/ 582 $45,292,047 4,366,272 $10.37 67.89% Weighted === =========== ========= ====== ====== Average
- ------------------ (1) Percentage of total leased GLA equals the approximate GLA of expiring leases divided by the total leased GLA square feet (6,430,541) The Development Properties We have rights in six development properties - Paxton Towne Centre, Metroplex Shopping Center, Creekview Shopping Center, Pavilion at Market East, Christiana Power Center Phase II and Frankford Arsenal. We acquired our rights to Metroplex Shopping Center and Christiana Power Center Phase II when we acquired The Rubin Organization, and we hold our rights subject to a contribution agreement executed in connection with that acquisition. The contribution agreement provides for PREIT Associates to issue Units, according to a formula, to former affiliates of The Rubin Organization as consideration for our rights in these properties. As Metroplex Shopping Center and Christiana Power Center Phase II are completed and leased up, they will be valued based on the following principles: o all space leased and occupied by credit-worthy tenants will be valued at ten times adjusted cash flow, computed as specified in the agreement; -6- o all space leased to a credit-worthy tenant but unoccupied will be valued at ten times adjusted cash flow calculated as though the space was built and occupied as shown in the property's budget; and o space not leased or occupied, whether built or unbuilt, will be valued as mutually agreed on or, failing agreement, by appraisal. Additional provisions exist for valuing triple net lease/purchase arrangements. Although each project will be valued as completed and an "account" established against which Units will be deemed to be credited, as well as deemed cash in an amount that would have been distributed on these deemed Units and a 10% interest factor on this deemed cash, no consideration will be paid until the earlier of: o the completion of the last property; o our abandonment of any uncompleted projects; or o September 30, 2002. At that time, we will value any uncompleted projects and PREIT Associates will issue Units equal in value to 50% of the amount, if any, by which the value of PREIT Associates' interest in each project exceeded the aggregate cost of the project at the time of completion. Negative amounts arising in connection with the completion or abandonment of any project will be netted back against earlier completed projects in order of completion. Units issued in respect of the foregoing valuations of the projects will be valued at the greater of (1) the average of the closing prices of the Shares for the twenty trading days before the date of the completion valuation and (2) $19.00. If the average of the closing prices of the Shares on the 20 trading days before each valuation is less than $19.00, PREIT Associates will issue additional Units, of a new class but equal in value to those Units not issued because of the operation of the pricing limitation. The following table presents information, as of December 31, 1999, regarding the development properties:
Percent Planned Owned Or Planned Owned To Be Square Square Expected Development Property Location Acquired* Feet Feet(1) Status(2) Completion -------------------- -------- --------- ---- ------- --------- ---------- Paxton Towne Center Harrisburg, PA 100%(3) 695,251 570,826 Construction 4th Quarter of 2000 Metroplex Shopping Center Plymouth Meeting, PA 50% 780,000 476,730 Construction 4th Quarter of 2000 Creekview Shopping Center Warrington, PA 100%(4) 418,416 129,500 Construction 4th Quarter of 2000 Pavilion at Market East Philadelphia, PA 100% 202,844 202,844 Development 4th Quarter of 2001 Christiana Power Center II Newark, DE 100% 445,000 445,000 Development 4th Quarter of 2001 Frankford Arsenal Philadelphia, PA 100% 508,559 508,559 Development 4th Quarter of 2001 --------- --------- TOTAL (6 Properties): 3,050,070 2,333,459 ========= =========
- ----------------------- * By PREIT Associates; we currently own approximately 90.7% of PREIT Associates. (1) Square footage subject to change. (2) "Development" indicates that development activities, such as site surveys, preparation of architectural plans or initiation of land use approvals or rezoning processes, have commenced, but construction has not commenced. "Construction" indicates that construction activities, such as site preparation, ground-breaking activities or exterior construction, has commenced. We cannot assure you that the properties that remain in the development stage will be constructed ultimately. (3) One of our affiliates owns one unit in a two-unit condominium regime that constitutes the shopping center. The other unit is owned by Target. (4) One of our affiliates owns one unit in a three-unit condominium regime that constitutes the shopping center. The other two units are owned by Target and Lowe's, respectively. -7- The Multifamily Properties We have interests in 19 multifamily properties with an aggregate of 7,242 units. We manage thirteen of these multifamily properties, and the remaining six multifamily properties are managed by one or more of our partners. If our partners currently managing these six multifamily properties are unable or unwilling to perform their obligations or responsibilities, we would manage these properties with our own staff. The following table presents information, as of December 31, 1999, regarding the 19 multifamily properties in which we have an interest:
Approx. Year Number Rentable Calendar 1999 Multifamily Percent Built/ Of Area Percent Average Rent Property Location Owned* Renov(1) Units(2) (Sq. Ft.) Occupied per Unit -------- -------- ------ -------- -------- --------- -------- -------- Emerald Point(3) Virginia Beach, VA 65% 1965/1993 862 846,000 94% $ 551 Boca Palms Boca Raton, FL 100% 1970,1991 522 673,000 95 938 /1994 Lakewood Hills Harrisburg, PA 100% 1972, 1975, 562 630,000 96 657 1982/1988 Regency Lakeside Omaha, NE 50% 1970/1990 433 492,000 97 963 Kenwood Gardens Toledo, OH 100% 1951/1989 504 404,000 92 448 Fox Run, Delaware Bear, DE 100% 1988 414 359,000 96 682 Eagle's Nest Coral Springs, FL 100% 1989 264 343,000 96 933 Palms of Pembroke Pembroke Pines, FL 100% 1989/1995 348 340,000 99 926 Hidden Lakes Dayton, OH 100% 1987/1994 360 306,000 88 624 Cobblestone Pompano Beach, FL 100% 1986/1994 384 297,000 96 742 Countrywood Tampa, FL 50% 1977/1997 536 295,000 97 478 Shenandoah Village West Palm Beach, FL 100% 1985/1993 220 286,000 99 953 Marylander Baltimore, MD 100% 1951/1989 507 279,000 99 538 Camp Hill Plaza Camp Hill, PA 100% 1967/1994 300 277,000 93 686 Fox Run, Warminster Warminster, PA 50% 1969/1992 196 232,000 100 697 Cambridge Hall West Chester, PA 50% 1967/1993 233 186,000 98 659 Will-O-Hill Reading, PA 50% 1970/1986 190 152,000 100 553 2031 Locust Street Philadelphia, PA 100% 1929/1986 87 89,000 100 1327 The Woods Ambler, PA 100% 1974 320 235,000 97 801 ----- --------- --- ---- Total/Weighted 7,242 6,721,000 96% $745 Average ===== ========= === ==== (19 properties) - -----------------------
* By PREIT Associates; we currently own approximately 90.7% of PREIT Associates. (1) Year initially completed and most recently renovated, and where applicable, year(s) in which additional phases were completed at the property. (2) Includes all apartment and commercial units occupied or available for occupancy at December 31, 1999. (3) See Recent Developments. -8- Other Properties Shortly following our organization, we acquired six industrial properties. We have not acquired any property of this type in over 20 years. We do not consider these properties to be strategically held assets. These properties, in the aggregate, contributed less than 3% of our net rental income in our fiscal year ended December 31, 1999, and we have been studying a program for the orderly liquidation of these assets. As part of this program, we sold our 50% interest in a warehouse and plant in Ft. Washington, Pennsylvania in 1999. The following table shows information, as of December 31, 1999, regarding the remaining five industrial properties:
Industrial Properties Year Percent Square Property and Location Acquired Owned* Feet Percentage Leased - --------------------- -------- ------ ---- ----------------- Warehouse and Distribution 1962 100% 294,000 100% Center Alexandria, VA Warehouse 1962 100% 12,034 100% Pennsauken, NJ Warehouse 1962 100% 16,307 100% Allentown, PA Warehouse 1963 100% 29,450 100% Pennsauken, NJ Warehouse and Plant 1963 100% 197,000 100% Lowell, MA ------- Total 548,791 =======
- ----------------------- * By PREIT Associates; we currently own approximately 90.7% of PREIT Associates. -9- Right of First Refusal Properties We obtained rights of first refusal with respect to the interests of some of the former affiliates of The Rubin Organization, after our acquisition of The Rubin Organization, in the three retail properties listed below: Right of First Refusal Properties Percentage Interest Gross Leasable Subject to the Right Property/Location Sq. Ft. of First Refusal - ----------------- ------- ---------------- Cumberland Mall, 463,000 50% Vineland, NJ Fairfield Mall, 418,000 50% Chicopce, MA Christiana Mall, 1,100,000 (1) Newark DE --------- Total 1,981,000 ========= - -------------------------- (1) The interest subject to the right of first refusal is subject to adjustment in connection with the refinancing of the participating mortgage that currently encumbers this property. Acquisition of The Rubin Organization On September 30, 1997, we completed a series of related transactions in which: o we transferred substantially all of our real estate interests to PREIT Associates; o PREIT Associates acquired all of the nonvoting common shares of The Rubin Organization (renamed "PREIT-RUBIN, Inc."), constituting 95% of the total equity of PREIT-RUBIN in exchange for the issuance of 200,000 Class A units of limited partnership interest in PREIT Associates ("Units") and a contingent obligation to issue up to 800,000 additional Units over the next five years, discussed below; o PREIT Associates acquired the interests of some of the former affiliates of The Rubin Organization in The Court at Oxford Valley, Magnolia Mall, North Dartmouth Mall and Springfield Park; Hillview Shopping Center and Northeast Tower Center at prices based upon a pre-determined formula; and subject to related obligations, in Christiana Power Center (Phase I and II), Red Rose Commons and Metroplex Shopping Center. Subsequent to September 30, 1997, by mutual agreement with the former affiliates of The Rubin Organization, PREIT Associates did not acquire Hillview Shopping Center. -10- The 800,000 additional Units discussed above are to be issued over the five-year period beginning October 1, 1997 and ending September 30, 2002 according to a formula based on our adjusted funds from operations per Share during the five year period. The contribution agreement established "hurdles" and "targets" during specified "earn-out periods" to determine whether, and to what extent, the contingent Units would be issued. For the three months ended December 31, 1997, 32,500 Units were earned, resulting in additional purchase price of approximately $830,000. For the year ended December 31, 1998, 130,000 Units were earned resulting in an additional purchase price of approximately $2.5 million. For the year ended December 31, 1999, 167,500 Units were earned, which will result in an additional purchase price of approximately $2.4 million. Under the contribution agreement, the hurdles and targets were adjusted on December 29, 1998 to account for the dilutive effect of our December 1997 public offering, as follows:
Per Share Adjusted FFO Base No. Max. No. ------------------ Contingent Contingent Earn-Out Period Hurdle Target TRO OP TRO OP --------------- ------ ------ ---------- -------- 1-1-98 to 12-31-98 2.13 2.39 20,000 130,000 1-1-99 to 12-31-99 2.30 2.58 57,500 167,500 1-1-00 to 12-31-00 2.43 2.72 57,500 167,500 1-1-01 to 12-31-01 2.72 3.03 57,500 167,500 1-1-02 to 9-30-02 2.19 2.43 52,500 135,000 ------- ------- Total 245,000 767,500 ======= =======
In general: o if the hurdle for any earn-out period is not met, no contingent Units will be issued in respect of that period; o if the target for any earn-out period is met, the maximum number of contingent Units for that period will be issued; and o if adjusted funds from operations for any earn-out period is between the hurdle and the target for the period, PREIT Associates would issue the base contingent Units for that period, plus a pro rata portion of the number of contingent Units by which the maximum contingent Units exceeded the base contingent Units for that period equal to the amount by which the per Share adjusted funds from operations exceeded the hurdle but was less than the target. The foregoing is subject to the right to carry back to prior earn-out periods amounts in excess of the target in the current period, thereby earning additional contingent Units, but never more than the maximum amount, and to carry forward into the next, but only the next, earn-out period amounts of per Share adjusted funds from operations which exceed the target in any such period, provided, in all cases, no amounts in excess of the target in any period may be -11- applied to result in the issuance of additional contingent Units in any other period until first applied to eliminate all shortfalls from targets in all prior periods. The contribution agreement provides that if we declared a share split, share dividend or other similar change in our capitalization, the "hurdle" and "target" levels will be proportionately adjusted. The contribution agreement also provides for the creation of a special committee of three independent Trustees to consider, among other matters, whether other equitable adjustments, either upward or downward, should be effected in the "hurdle" and "target" levels to reflect: o our incurrence of non-project specific indebtedness or our raising of equity capital; o our breach of any of our representations or warranties in the contribution agreement which may adversely affect adjusted funds from operations; and o the effect on adjusted funds from operations of any adverse judgment in litigation pending against us. For the two years and nine months commencing January 1, 2000, we may be required to issue the remaining 470,000 Units, depending on our per share "adjusted funds from operations" during this period. "Adjusted funds from operations" is defined as our consolidated net income for any period, plus, to the extent deducted in computing such net income: o depreciation attributable to real property; o certain amortization expenses; o the expenses of the acquisition of The Rubin Organization; o losses on the sale of real estate; o material write-downs on real estate; o material prepayment fees; and o rents currently due in excess of rents reported, minus: - rental revenue reported in excess of amounts currently due; - lease termination fees; and - gains on the sale of real estate. Competition, Regulation and Other Factors REAL ESTATE INDUSTRY WE FACE RISKS ASSOCIATED WITH LOCAL REAL ESTATE CONDITIONS IN AREAS WHERE WE OWN PROPERTIES We may be affected adversely by general economic conditions and local real estate conditions. For example, an oversupply of retail space or apartments -12- in a local area or a decline in the attractiveness of our properties to shoppers, residents or tenants would have a negative effect on us. Other factors that may affect general economic conditions or local real estate conditions include: o population trends o income tax laws o availability and costs of financing o construction costs WE MAY BE UNABLE TO COMPETE WITH OUR LARGER COMPETITORS AND OTHER ALTERNATIVES TO OUR PORTFOLIO OF PROPERTIES The real estate business is highly competitive. We compete for interests in properties with other real estate investors and purchasers, many of whom have greater financial resources, revenues and geographical diversity than we have. Furthermore, we compete for tenants with other property owners. Our apartment properties portfolio competes with providers of other forms of housing, such as single family housing. Competition from single family housing increases when lower interest rates make mortgages more affordable. All of our shopping center and apartment properties are subject to significant local competition. WE ARE SUBJECT TO SIGNIFICANT REGULATION THAT INHIBITS OUR ACTIVITIES Local zoning and use laws, environmental statutes and other governmental requirements restrict our expansion, rehabilitation and reconstruction activities. These regulations may prevent us from taking advantage of economic opportunities. Legislation such as the Americans with Disabilities Act may require us to modify our properties. Future legislation may impose additional requirements. We cannot predict what requirements may be enacted. OUR PROPERTIES WE FACE RISKS THAT MAY RESTRICT OUR ABILITY TO DEVELOP PROPERTIES There are risks associated with our development activities in addition to those generally associated with the ownership and operation of established shopping centers and multifamily properties. These risks include: o expenditure of money and time on projects that may never be completed o higher than estimated construction costs o late completion because of unexpected delays in zoning approvals, other land use approvals, construction or other factors outside of our control o failure to obtain zoning, occupancy or other governmental approvals -13- The risks described above are compounded by the fact that we must distribute 95% of our taxable income in order to maintain our qualification as a REIT. As a result of these distribution requirements, new developments are financed primarily through lines of credit or other forms of construction financing. Because we incur debt to finance the developments, our loss could exceed our equity investment in these developments. Furthermore, we must acquire and develop suitable high traffic retail sites at costs consistent with the overall economics of the project. Because retail development is extremely competitive, we cannot assure you that we can contract for appropriate sites within our geographic markets. MANY OF OUR PROPERTIES ARE OLD AND IN NEED OF MAINTENANCE AND/OR RENOVATION Many of the properties in which we have an interest were constructed more than 15 years ago. We generally spend more on maintenance of these older properties than we do on newer properties. Because older properties may be obsolete in some respects, they may generate lower rentals or may require significant capital expense for renovations. Some apartments lack amenities that are customarily included in modern construction, such as dishwashers, central air conditioning and microwave ovens. Some facilities are difficult to lease because they are too large, too small or inappropriately proportioned for today's market. We generally consider renovation of properties when renovation will enhance or maintain the long-term value of our properties. WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE AND EFFECTIVELY MANAGE THE PROPERTIES WE ACQUIRE Subject to the availability of financing and other considerations, we intend to continue to acquire interests in properties that we believe will be profitable or will enhance the value of our portfolios. Some of these properties may have unknown characteristics or deficiencies. Therefore, it is possible that some properties will be worth less or will generate less revenue than we believe at the time of acquisition. It is also possible that the operating performance of some of our properties will decline. To manage our growth effectively, we must successfully integrate new acquisitions. We cannot assure you that we will be able to successfully integrate or effectively manage additional properties. When we acquire properties, we also take on other risks, including: o financing risks (some of which are described below) o the risk that we will not meet anticipated occupancy or rent levels o the risk that we will not obtain required zoning, occupancy and other governmental approvals -14- o the risk that there will be changes in applicable zoning and land use laws that affect adversely the operation or development of our properties WE MAY BE UNABLE TO RENEW LEASES OR RELET SPACE AS LEASES EXPIRE When a lease expires, a tenant may refuse to renew it. We may not be able to relet the property on similar terms, if we are able to relet the property at all. We have established an annual budget for renovation and reletting expenses that we believe is reasonable in light of each property's operating history and local market characteristics. This budget, however, may not be sufficient to cover these expenses. OUR TENANTS MAY FAIL TO MAKE RENTAL PAYMENTS WHEN DUE At any time, a tenant may experience a downturn in its business that may weaken its financial condition. As a result, the tenant may fail to make rental payments when due, or may declare bankruptcy. Either event could result in the termination of that tenant's lease and material losses to us. We receive a substantial portion of our shopping center income as rents under long-term leases. If retail tenants are unable to comply with the terms of their leases because of rising costs or falling sales, we may modify lease terms to allow tenants to pay a lower rental or a smaller share of operating costs and taxes. OUR CASUALTY INSURANCE MAY BE INADEQUATE We generally maintain casualty insurance on our assets. We believe that our insurance is adequate. However, we would be required to bear all losses to the properties that are not adequately covered by insurance. We cannot assure you that we can obtain insurance in the future at acceptable levels and reasonable cost. WE FACE RISKS DUE TO LACK OF GEOGRAPHIC DIVERSITY All but one of our properties are located in the eastern United States. A majority of the properties are located either in Pennsylvania or Florida. General economic conditions and local real estate conditions in these geographic regions have a particularly strong effect on us. Other REITs may have a more geographically diverse portfolio and thus may be less susceptible to downturns in one or more regions. WE FACE POSSIBLE ENVIRONMENTAL LIABILITIES Current and former real estate owners and operators may be required by law to investigate and clean up hazardous substances released at the properties they own or operate. They may also be liable to the government or to third parties for substantial property damage, investigation costs and cleanup costs. -15- In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs the government incurs in connection with the contamination. Contamination may affect adversely the owner's ability to sell or lease real estate or to borrow with the real estate as collateral. From time to time, we respond to inquiries from environmental authorities with respect to properties both currently and formerly owned by us. We cannot assure you of the results of pending investigations, but we do not believe that resolution of these matters will have a material adverse effect on our financial condition or results of operations. We have no way of determining at this time the magnitude of any potential liability to which we may be subject arising out of unknown environmental conditions or violations with respect to the properties we formerly owned. Environmental laws today can impose liability on a previous owner or operator of a property that owned or operated the property at a time when hazardous or toxic substances were disposed of, or released from, the property. A conveyance of the property, therefore, does not relieve the owner or operator from liability. As to five properties, two of which we no longer own, we or a partnership in which we have an interest have responded to inquiries from environmental authorities. In one of these properties, we believe that the contamination was caused by a former tenant and we have sought indemnification from the tenant. The remaining estimated cost to remediate this property ranges from $50,000 to $100,000. In another instance, we will only be liable for remediation costs in excess of $1.0 million, and we do not anticipate currently that remediation costs will exceed $1.0 million. If remediation costs for this property exceed $1.0 million, our liability is not expected to exceed $0.3 million. At four properties in which we currently have an interest, the environmental conditions continue to be investigated and have not been remediated fully. At three of these properties, groundwater contamination has been found. At one of the properties, the former owner of the property is remediating the groundwater contamination. At two of the properties, the groundwater contamination was associated with a dry cleaning operation. Although the properties with contamination arising from dry cleaning operations may be eligible under a state law for remediation with state funds, we cannot assure you that sufficient funds will be available under the legislation to pay the full costs of any such remediation. There are asbestos-containing materials in a number of our properties, primarily in the form of floor tiles and adhesives. The floor tiles and adhesives are generally in good condition. Fire-proofing material containing asbestos is present at some of our properties in limited concentrations or in limited areas. At properties where radon has been identified as a potential concern, we have remediated or are performing additional testing. Lead-based paint has been identified at certain of our multifamily properties and we have notified tenants under applicable disclosure requirements. Based on our current knowledge, we do not believe that the future liabilities associated with asbestos, radon and lead-based paint at the foregoing properties will be material. We have no insurance coverage for the types of environmental liabilities described above. In 1994, we established a reserve for environmental -16- remediation costs of $0.6 million. In addition, we received a credit of $0.4 million for environmental matters in connection with the acquisition of two properties. Since 1994, a total of $0.7 million has been charged against the reserve. We also reduced the reserve by $0.2 million, leaving a balance of $0.1 million, which approximates our share of the remaining environmental liability. We cannot assure you that these amounts will be adequate to cover future environmental costs. We are aware of environmental concerns at three of our development properties. Our present view is that our share of any remediation costs necessary in connection with the development of these properties will be within the budgets for development of these properties, but the final costs and necessary remediation are not known and may cause us to decide not to develop one or more of these properties. FINANCING RISKS WE FACE RISKS GENERALLY ASSOCIATED WITH OUR DEBT We finance parts of our operations and acquisitions through debt. This debt creates risks, including: o rising interest rates on our floating rate debt o failure to prepay or refinance existing debt, which may result in forced disposition of properties on disadvantageous terms o refinancing terms less favorable than the terms of existing debt o failure to meet required payments of principal and interest WE MAY NOT BE ABLE TO COMPLY WITH LEVERAGE RATIOS IMPOSED BY OUR CREDIT FACILITY OR TO USE OUR CREDIT FACILITY WHEN CREDIT MARKETS ARE TIGHT We currently use a secured credit facility for working capital, acquisitions, renovations and capital improvements to our properties. The credit facility currently requires our operating partnership, PREIT-Associates, to maintain certain asset and income to debt ratios and minimum income and net worth levels. If PREIT Associates fails to meet any one or more of these requirements, we would be in default. The lenders, in their sole discretion, may waive a default. We might secure alternative or substitute financing. We cannot assure you, however, that we can obtain waivers or alternative financing. Any default may have a materially adverse effect on our operations and financial condition. We expect to use our credit facility from time to time for acquisitions, development, renovations and capital improvements to our -17- properties. When the credit markets are tight, we may encounter resistance from lenders when we seek financing or refinancing for some of our properties. If the credit facility is reduced significantly or withdrawn, our operations would be affected adversely. If we are unable to increase our borrowing capacity under the credit facility, our ability to make acquisitions and grow would be affected adversely. We cannot assure you as to the availability or terms of financing for any particular property. We have entered into agreements limiting the interest rate on portions of our credit facility. If other parties to these agreements fail to perform as required by the agreements, we may suffer credit loss. WE MAY BE UNABLE TO OBTAIN LONG-TERM FINANCING REQUIRED TO FINANCE OUR PARTNERSHIPS AND JOINT VENTURES. The profitability of each partnership or joint venture in which we are a partner or co-venturer that has short-term financing or debt requiring a balloon payment is dependent on the availability of long-term financing on satisfactory terms. If satisfactory financing is not available, we may have to rely on other sources of short-term financing, equity contributions or the proceeds of refinancing of existing properties to satisfy debt obligations. Although we do not own the entire interest in connection with many of the properties held by a partnership or joint venture, we may be required to pay the full amount of any obligation of the partnership or joint venture that we have guaranteed in whole or in part to protect our equity interest in the property owned by the partnership or joint venture. Additionally, we may determine to pay a partnership's or joint venture's obligation to protect our equity interest in its assets. GOVERNANCE WE MAY BE UNABLE TO EFFECTIVELY MANAGE OUR PARTNERSHIPS AND JOINT VENTURES DUE TO DISAGREEMENTS WITH OUR PARTNERS AND JOINT VENTURERS Generally, we hold interests in our portfolio properties through PREIT Associates. In many cases we hold properties through joint ventures or partnerships with third-party partners and joint venturers and, thus, we hold less than 100% of the ownership interests in these properties. Of the properties with respect to which our ownership is partial, most are owned by partnerships in which we are a general partner. The remaining properties are owned by joint ventures in which we have substantially the same powers as a general partner. Under the terms of the partnership and joint venture agreements, major decisions, such as a sale, lease, refinancing, expansion or rehabilitation of a property, or a change of property manager, require the consent of all partners or co-venturers. Because decisions must be unanimous, necessary actions may be delayed significantly. It may be difficult or even impossible to change a property manager if a partner or co-venturer is serving as property manager. Business disagreements with partners may arise. We may incur substantial expenses in resolving these disputes. To preserve our investment, we may be required to make commitments to or on behalf of a partnership or venture during a dispute. Moreover, we cannot assure you that our resolution of a dispute with a partner will be on terms that are favorable to us. -18- Other risks of investments in partnerships and joint ventures include: o partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions o partners or co-venturers might have business interests or goals that are inconsistent with our business interests or goals o partners or co-venturers may be in a position to take action contrary to our policies or objectives o potential liability for the actions of our partners or co-venturers WE ARE RESTRICTED FROM EXPERIENCING A SALE OR CHANGE IN CONTROL Our Trust Agreement restricts the possibility of our sale or change in control, even if a sale or change in control were in our shareholders' interest. These restrictions include the ownership limit designed to ensure qualification as a REIT, the staggered terms of our Trustees and our ability to issue preferred shares. Additionally, we have adopted a rights plan that may deter a potential acquiror from attempting to acquire us. WE HAVE ENTERED INTO AGREEMENTS RESTRICTING OUR ABILITY TO SELL SOME OF OUR PROPERTIES Because some limited partners of PREIT Associates may suffer adverse tax consequences if certain properties owned by PREIT Associates are sold, we, as the general partner of PREIT Associates, have agreed from time to time, subject to certain exceptions, that the consent of the holders of a majority (or all) of certain limited partner interests issued by PREIT Associates in exchange for a property is required before that property may be sold. These agreements may result in our being unable to sell one or more properties, even in circumstances in which it would be advantageous to do so. WE MAY ISSUE PREFERRED SHARES WITH GREATER RIGHTS THAN YOUR SHARES Our Board of Trustees may issue up to 25,000,000 preferred shares without shareholder approval. Our Board of Trustees may determine the relative rights, preferences and privileges of each class or series of preferred shares. Because our Board of Trustees has the power to establish the preferences and rights of the preferred shares, preferred shares may have preferences, distributions, powers and rights senior to your rights as a shareholder. WE MAY AMEND OUR BUSINESS POLICIES WITHOUT YOUR APPROVAL Our Board of Trustees determines our growth, investment, financing, capitalization, borrowing, REIT status, operating and distribution policies. Although the Board of Trustees has no present intention to amend or revise any of these policies, these policies may be amended or revised without notice to shareholders. Accordingly, shareholders may not have control over changes in our policies. We cannot assure you that changes in our policies will serve fully the interests of all shareholders. -19- LIMITED PARTNERS OF PREIT ASSOCIATES, L.P. MAY VOTE ON FUNDAMENTAL CHANGES WE PROPOSE Our assets are generally held through PREIT Associates, a Delaware limited partnership of which we are the sole general partner. We currently hold a majority of the limited partner interests in PREIT Associates. However, PREIT Associates may from time to time issue additional limited partner interests in PREIT Associates to third parties in exchange for contributions of property to PREIT Associates. These issuances will dilute our percentage ownership of PREIT Associates. Limited partner interests in PREIT Associates generally do not carry a right to vote on any matter voted on by our shareholders, although limited partner interests may, under certain circumstances, be redeemed for Shares. However, before the date on which at least half of the partnership interests issued on September 30, 1997 have been redeemed, the holders of partnership interests issued on September 30, 1997 are entitled to vote, along with our shareholders, on any proposal to merge, consolidate or sell substantially all of our assets. Our partnership interests are not included for purposes of determining when half of the partnership interests have been redeemed, nor are they counted as votes. We cannot assure you that we will not agree to extend comparable rights to other limited partners in PREIT Associates. OUR SUCCESS DEPENDS IN PART ON RONALD RUBIN We are dependent on the efforts of Ronald Rubin, our Chief Executive Officer. The loss of his services could have an adverse effect on our operations. If Mr. Rubin were to terminate his employment, his current employment agreement with us would prevent him from becoming an employee of one of our competitors for one year. PREIT-RUBIN WE DO NOT CONTROL OUR MANAGEMENT COMPANY, PREIT-RUBIN Although PREIT Associates owns 95% of the equity interests in our management affiliate, PREIT-RUBIN, all of PREIT-RUBIN's voting stock is owned by a stock bonus plan created for the benefit of PREIT-RUBIN's employees. PREIT-RUBIN's employees are entitled to vote the common shares vested in their accounts in the stock bonus plan on fundamental transactions such as a merger or sale of assets. A Stock Bonus Plan Committee votes the shares in the stock bonus plan on all other matters. PREIT-RUBIN's Board of Directors appoints the Stock Bonus Plan Committee's members. Thus, we do not control the day-to-day operations of PREIT-RUBIN and we have no legal power to influence the manner in which it performs its management obligations, seeks and accepts new business or otherwise determines its business strategy. WE FACE RISKS ASSOCIATED WITH PREIT-RUBIN'S MANAGEMENT OF PROPERTIES OWNED BY THIRD PARTIES -20- PREIT-RUBIN manages a substantial number of properties owned by third parties. Risks associated with the management of properties owned by third parties include: o the property owner's termination of the management contract o loss of the management contract in connection with a property sale o non-renewal of the management contract after expiration o renewal of the management contract on terms less favorable than current terms o decline in management fees as a result of general real estate market conditions or local market factors OUR EMPLOYEES WHO WORK BOTH FOR US AND FOR PREIT-RUBIN MAY HAVE CONFLICTS OF INTEREST There are numerous potential conflicts of interest relating to our investment in PREIT-RUBIN. The interest of those members of our management who are also PREIT-RUBIN affiliates may diverge from your interests. PREIT-RUBIN's employees work on our behalf. However, PREIT-RUBIN will continue to render management, development, leasing and related services to a substantial number of properties in which affiliates of PREIT-RUBIN retain equity interests. We believe that PREIT-RUBIN's management arrangements with these entities are on terms at least as favorable to PREIT-RUBIN as the average of management arrangements with parties unrelated to PREIT-RUBIN. In addition, PREIT-RUBIN leases substantial office space from entities in which our affiliates have an interest. OTHER RISKS WE MAY FAIL TO QUALIFY AS A REIT AND YOU MAY INCUR TAX LIABILITIES AS A RESULT If we fail to qualify as a REIT, we will be subject to Federal income tax at regular corporate rates. In addition, we might be barred from qualification as a REIT for the four years following disqualification. The additional tax incurred at regular corporate rates would reduce significantly the cash flow available for distribution to shareholders and for debt service. To qualify as a REIT, we must comply with certain highly technical and complex requirements. We cannot be certain we have complied because there are few judicial and administrative interpretations of these provisions. In addition, facts and circumstances that may be beyond our control may affect our ability to qualify as a REIT. We cannot assure you that new legislation, regulations, administrative interpretations or court decisions will not change the tax laws significantly with respect to our qualification as a REIT or with respect to the federal income tax consequences of qualification. We believe that we have qualified as a REIT since our inception and intend to continue to qualify as a REIT. However, we cannot assure you that we have been qualified or will remain qualified. -21- WE MAY BE UNABLE TO COMPLY WITH THE STRICT INCOME DISTRIBUTION REQUIREMENTS APPLICABLE TO REITS To obtain the favorable tax treatment associated with qualifying as a REIT, we are required each year to distribute to our shareholders at least 95% of our net taxable income. We could be required to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT, even if conditions were not favorable for borrowing. Employees We employ approximately 745 people on a full-time basis. Item 2. Properties We refer you to the tables under "Item 1. Business" for the properties we own, both wholly and those in which we have a percentage interest. PREIT-RUBIN, Inc. has leased 11,421 square feet (2nd Floor) and 28,064 square feet (3rd Floor) of space for its principal offices at 200 S. Broad Street, Philadelphia, PA, under a new lease with a lease term of ten (10) years. The base rent is $19.50 per square foot. The lease for 500 Madison Street, Chicago, Illinois expired on November 30, 1999. The lease for the Atlanta office was terminated by PREIT on November 30, 1999. The Maitland office was closed on May 15, 1999. The lease for the apartment at 1730 North Clark Street, Chicago, Illinois expired by its terms on August 31, 1999. Titles to all of our real estate investments have been searched and reported to us by reputable title companies. The exceptions listed in the title reports will not, in our opinion, interfere materially with our use of the respective properties for the intended purposes. Schedule of Real Estate and Accumulated Depreciation We refer you to Schedule III, "Real Estate and Accumulated Depreciation," of the financial statement schedules set forth herein and incorporated herein by reference for the amount of encumbrances, initial cost of the properties to us, cost of improvements, the amount at which carried and the amount of the accumulated depreciation. -22- Item 3. Legal Proceedings From time to time, we are a plaintiff or defendant in various cases arising out of our usual and customary business of owning and investing in real estate, both directly and through joint ventures and partnerships. We cannot assure you of the results of pending litigation, but we do not believe that resolution of these matters will have a material adverse effect on our financial condition or results of operations. Item 4. Submission of Matters to a Vote of Security Holders None. -23- PART II Item 5. Market for Our Common Equity and Related Shareholder Matters Shares The Shares began trading on the New York Stock Exchange on November 14, 1997 (ticker symbol: PEI). Before then, the Shares were traded on the American Stock Exchange. Market Price and Distribution Record The following table presents the high and low sales prices for the Shares, as reported by the New York Stock Exchange, and cash distributions paid for the periods indicated: Distributions High Low Paid - -------------------------------------------------------------------------------- Quarter ended March 31, 1999 20.25 18.56 $.47 Quarter ended June 30, 1999 21.69 18.56 .47 Quarter ended September 30, 1999 21.00 18.56 .47 Quarter ended December 31, 1999 18.88 14.00 .47 ----- $1.88 ===== Distributions High Low Paid - -------------------------------------------------------------------------------- Quarter ended March 31, 1998 25.25 23.50 $.47 Quarter ended June 30, 1998 24.69 21.50 .47 Quarter ended September 30, 1998 24.13 18.63 .47 Quarter ended December 31, 1998 21.50 18.75 .47 ----- $1.88 ===== As of December 31, 1999, there were approximately 1,260 holders of record of the Shares. We currently anticipate that cash distributions will continue to be paid in the future in March, June, September and December; however, our future payment of distributions will be at the discretion of our Board of Trustees and will depend on numerous factors, including our cash flow, financial condition, capital requirements, annual distribution requirements under the real estate investment trust provisions of the Internal Revenue Code and other factors that our Board of Trustees deems relevant. -24- Units Class A and Class B Units are redeemable by PREIT Associates at the election of the limited partner holding the Units for the consideration set forth in PREIT Associates' partnership agreement. In general, and subject to exceptions and limitations, beginning one year following the respective issue dates, "qualifying parties" may give one or more notices of redemption with respect to all or any part of the Class A Units so received and then held by that party. Class B Units are redeemable at the option of the holder at any time after issuance. If a notice of redemption is given, we have the right to elect to acquire the Units tendered for redemption for our own account, either in exchange for the issuance of a like number of Shares, subject to adjustments for stock splits, recapitalizations and like events, or a cash payment equal to the average of the closing prices of the Shares on the ten consecutive trading days immediately before our receipt, in our capacity as general partner of PREIT Associates, of the notice of redemption. If we decline to exercise this right, then on the tenth day following tender for redemption PREIT Associates will pay a cash amount equal to the number of Units so tendered multiplied by such average closing price. PREIT Associates issued the Units under exemptions provided by Section 4(2) of the Securities Act of 1933 and Regulation D promulgated under the Securities Act. -25- Item 6. Selected Financial Data
Selected Financial Information Calendar Calendar 4-Month Year Year Period Ended Ended Ended 12/31 12/31 12/31 Fiscal Years Ended 8/31 Thousands of dollars, except per share results 1999 1998 1997 1997 1996 1995 -------- -------- ------- ---- ---- ---- Operating Results Gross revenues from real estate $89,220 $61,745 $17,170 $40,231 $38,985 $36,978 Income before gains on sales of interests in real estate 18,976 20,142 3,872 9,166 10,179 11,106 Gains on sales of interests in real estate 1,763 3,043 2,090 1,069 865 119 Net income 20,739 23,185 5,962 10,235 11,044 11,225 ======= ======= ======= ======= ======= ======= Per Share Results Income before gains on sales of interests in real estate $1.43 $1.51 $.43 $1.06 $1.17 $1.28 Gains on sales of interests in real estate .13 .23 .23 .12 .10 .01 Net income 1.56 1.74 .66 1.18 1.27 1.29 ======= ======= ======= ======= ======= ======= Balance Sheet Data Investments in real estate, at cost $577,521 $509,406 $287,926 $202,443 $198,542 $195,929 Total assets 547,590 481,615 265,566 165,657 177,725 181,336 Total mortgage, bank and construction loans payable 364,634 302,276 103,939 117,412 124,148 122,518 Shareholders' equity 133,412 137,082 138,530 40,899 46,505 51,771 ======= ======= ======= ======= ======= ======= Other Data Cash flows from operating activities $32,311 $31,138 $4,281 $15,219 $15,090 $16,672 Cash distributions per share 1.88 1.88 .47 1.88 1.88 1.88 ======= ======= ======= ======= ======= ======= Funds from Operations Calendar Calendar 4-Month Year Year Period Ended Ended Ended 12/31 12/31 12/31 Fiscal Years Ended 8/31 1999 1998 1997 1997 1996 1995 -------- -------- ------- ---- ---- ---- Income before minority interest in operating partnership and extraordinary item $22,861 $24,878 $6,656 $10,235 $11,044 $11,225 Less: Gains on sales of interests in real estate (1,763) (3,043) (2,090) (1,069) (865) (119) Plus: Provision for losses -- -- -- 500 -- -- Depreciation and amortization: Wholly owned and consolidated partnerships 14,005 9,285 2,629 5,989 5,650 5,044 Unconsolidated partnerships and joint ventures 4,573 4,067 1,252 3,380 3,334 3,214 Excess purchase price over net asset acquired 195 115 29 -- -- -- Refinancing prepayment fees 55 -- -- 1,133 -- -- Less: Depreciation of non-real estate assets (240) (228) (76) (222) (202) (173) Amortization of deferred financing costs (775) (498) (254) (286) (333) (228) ------- ------- ------ ------- ------- ------- Funds from operations $38,911 $34,576 $8,146 $19,660 $18,628 $18,963 ======= ======= ====== ======= ======= =======
-26- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto included elsewhere in this report. Acquisitions - ------------ The Company is actively involved in pursuing and evaluating a number of individual property and portfolio acquisition opportunities. In addition, the Company has stated that a key strategic goal is to obtain managerial control of all of its assets. In certain cases where existing joint venture assets are managed by outside partners, the Company is considering the possible acquisition of these outside interests. In certain cases where that opportunity does not exist, the Company is considering the disposition of its interests. There can be no assurance that the Company will consummate any such acquisition or disposition. 1999 Acquisitions Significant 1999 acquisitions include the purchase of land for three development properties: Creekview Shopping Center, a 418,000 square-foot power center in Warrington, PA; Metroplex Shopping Center, a 780,000 square-foot power center in Plymouth Meeting, PA; and Paxton Towne Centre, a 695,000 square-foot power center in Harrisburg, PA. Other acquisitions during 1999 include the Home Depot at the Northeast Tower Center in Philadelphia, PA and Florence Commons, a 197,000 square-foot strip center adjacent to Magnolia Mall in Florence, SC. On December 15, 1999, the Company also acquired an additional 10% interest (60% total interest) in Rio Mall, a 166,000 square-foot strip center in Rio Grande, NJ. 1998 Acquisitions Significant 1998 acquisitions include Prince Georges Plaza, a 745,000 square-foot regional shopping center in Hyattsville, MD; Festival at Exton, a 140,000 square-foot community shopping center in Chester County, PA; The Woods, a 320-unit apartment complex in Ambler, PA; and Northeast Tower Center (an 89% interest), a 479,000 square-foot power center in Philadelphia, PA, plus an adjacent parcel of land for the development of an additional 100,000 square feet. The Company also concluded the acquisitions of strip centers in Springfield, PA (a 50% interest) and Valleyview in Wilmington, DE with 67,000 and 56,000 square-feet, respectively. The Company also opened Phase I of its Christiana Power Center with approximately 300,000 square-feet in Newark, DE in September 1998, which had been acquired as undeveloped land in early 1998. On December 18, 1998, the Company also acquired the remaining 50% interests in two multifamily properties and a parcel of undeveloped land. Dispositions - ------------ Consistent with management's stated long-term strategic plan to review and evaluate all joint venture real estate holdings and non-core properties, the Company sold its interest in four properties and also sold surplus land at Crest Plaza in Allentown, PA. The four properties sold by the Company include 135 Commerce Drive, a 141,000 square-foot warehouse in Fort Washington, PA; 54 acres of undeveloped land in Rancocas, NJ; 14 acres of undeveloped land in Coral Springs, FL; and 22 acres of undeveloped land in Elizabethtown, PA. The combined cash proceeds of $6.6 million were applied and reduced outstanding borrowings under the Company's Credit Facility. Development, Expansions and Renovations - --------------------------------------- The Company is involved in a number of development and redevelopment projects, which may require equity funding by the Company or third-party debt or equity financing (see Note 11 to the Consolidated Financial Statements). In each case, the Company will evaluate the financing opportunities available to it at the time a project requires funding. In cases where the project is undertaken with a joint venture partner, the Company's flexibility in funding the project may be governed by the joint venture agreement or the covenants existing in its line of credit which limit the use of borrowed funds in joint venture projects. -27- The following tables summarize the financial terms of the 1999 and 1998 acquisitions:
Acquisition Property Property Property Location Purchase Date Name Type City State Price (in thousands) 1/12/99 Creekview Shopping Center Power Center Warrington PA $ 1,380 4/1/99 Northeast Tower Center (Home Depot) Power Center Philadelphia PA 13,500 6/8/99 Metroplex Shopping Center Power Center Plymouth Meeting PA 9,880 6/25/99 Paxton Towne Centre Power Center Harrisburg PA 20,000 12/15/99 Florence Commons Shopping Center Florence SC 6,417 12/15/99 Rio Mall Shopping Center Rio Grande NJ 260 -------- Total Completed 1999 Acquisitions $ 51,437 ======== 1/26/98 Christiana Power Center Power Center Newark DE $ 8,700 5/12/98 Springfield Park Shopping Center Springfield PA 3,700 7/21/98 Valleyview Shopping Center Wilmington DE 4,300 8/7/98 The Woods Apartments Ambler PA 21,200 8/27/98 Festival at Exton Shopping Center Exton PA 18,400 9/17/98 Prince Georges Plaza Regional Mall Hyattsville MD 65,000 12/18/98 Fox Run Apartments Bear DE 15,388 12/18/98 Eagle's Nest Apartments Coral Springs FL 16,087 12/18/98 Turtle Run Land Coral Springs FL 2,900 12/23/98 Northeast Tower Center Shopping Center Philadelphia PA 25,000 -------- Total Completed 1998 Acquisitions $180,675 ========
[RESTUBED TABLE FOR ABOVE]
Capital Resources (in thousands) Acquisition ----------------------------------------------- Date Credit Facility New/Assumed Debt OP Units 1/12/99 $ 1,380 $ -- $ -- 4/1/99 -- 12,500 1,000 6/8/99 -- 9,880 -- 6/25/99 20,000 -- -- 12/15/99 6,417 -- -- 12/15/99 260 -- -- ------- ------- ------ $28,057 $22,380 $1,000 ======= ======= ====== 1/26/98 $ 6,000 $ -- $3,070(1) 5/12/98 3,700 -- -- 7/21/98 1,300 -- 3,000 8/7/98 12,200 7,300 1,700 8/27/98 18,400 -- -- 9/17/98 19,000 43,000 3,000 12/18/98 388 15,000 -- 12/18/98 387 15,700 -- 12/18/98 -- 2,900 -- 12/23/98 3,700 18,000 3,300 ------- -------- ------- $65,075 $101,900 $14,070 ======= ======== =======
(1) Estimate of OP units to be issued upon completion of Phase I of the project (see Note 11 to the Consolidated Financial Statements). -28- Results of Operations - --------------------- Operating Results Calendar Year Ended Calendar Year Ended (In thousands) 12/31/99 12/31/98 Revenues Gross revenues from real estate $89,220 $61,745 Interest and other income 1,144 650 ------- ------- 90,364 62,395 ------- ------- Expenses Property operating expenses 31,783 22,519 Depreciation and amortization 14,223 9,406 General and administrative expenses 3,560 3,351 Interest expense 21,842 10,591 ------- ------- 71,408 45,867 ------- ------- Equity in loss of PREIT-RUBIN, Inc. 18,956 16,528 Equity in income of partnerships and joint ventures (4,036) (678) Minority interest in operating partnership 6,178 5,985 Loss on early extinguishment of debt (2,122) (1,423) Net income before gains on sales of interests in real estate -- (270) ------- ------- Gains on sales of interests in real estate 18,976 20,142 Net Income 1,763 3,043 ------- ------- $20,739 $23,185 ======= ======= Calendar Year December 31, 1999 compared with Calendar Year December 31, 1998 Net income for the calendar year ended December 31, 1999 before gains on sales of interests in real estate, decreased 5% to $19.0 million from $20.1 million for the calendar year 1998. In 1999, net gains on the sales of interests in real estate were $1.8 million as compared to $3.0 million in 1998. In 1999, gains were recognized from the sales of interests in 135 Commerce Drive, Fort Washington, PA and undeveloped land in Rancocas, NJ, Coral Springs, FL, Elizabethtown, PA and Allentown, PA. In 1998, gains resulted from sales of the Company's interests in Punta Gorda Mall, Punta Gorda, FL; Ormond Beach Mall, Daytona Beach, FL and Charter Pointe Apartments in Altamonte Springs, FL. Gross revenues from real estate increased by $27.5 million or 44% to $89.2 million for the year ended December 31, 1999, as compared to the year ended December 31, 1998. The 1999 period included an increase of $25.8 million of revenues attributable to the 1998 acquisitions. The balance of the increase in revenues of $1.7 million is attributable to an increase in revenues from properties owned during both periods. This was primarily the result of an increase in multifamily revenues of $1.2 million. In 1999, property operating expenses increased by $9.3 million to $31.8 million. The 1999 period included $8.7 million of expenses attributable to the 1998 acquisitions. The balance of the increase of $0.6 million is attributable to operating expenses from properties owned during both periods. This increase was primarily due to an increase in multifamily operating costs. In 1999, depreciation and amortization increased by $4.8 million to $14.2 million primarily as a result of the 1998 acquisitions. Depreciation and amortization for properties owned during both periods increased by $0.3 million. -29- In 1999, interest expense increased by $11.2 million to $21.8 million. Interest expense attributable to mortgaged properties increased by $10.9 million due to the 1998 acquisitions ($5.6 million) and the refinance of multifamily properties in the second quarter of 1999 ($5.3 million). Interest expense incurred against the Company's Credit Facility increased by $0.3 million. Equity in income of partnerships and joint ventures increased by $0.2 million to $6.2 million primarily as a result of an increase in multifamily revenues from partnerships and joint ventures. Equity in net loss of PREIT-RUBIN, Inc. for the 1999 period was $4.0 million compared with $0.7 million for the 1998 period primarily attributable to a decrease in leasing commissions of $2.8 million due to several large, non-recurring leasing commissions earned in the 1998 period and a decrease in development fees of $0.8 million due to the completion of several development projects that generated fees in 1998 only. Minority interest in the operating partnership increased $0.7 million as a result of the Units issued in connection with the Company's acquisition of The Rubin Organization and Units issued in connection with five acquisitions during 1998 and one transaction during 1999. In 1998, loss on early extinguishment of debt was due to a refinancing prepayment fee on Fox Run Apartments of $0.3 million. Calendar Year December 31, 1998 compared with Calendar Year December 31, 1997 Net income for the calendar year ended December 31, 1998 before gains on sales of interests in real estate, increased 107% to $20.1 million from $9.7 million for the comparable period of 1997. In 1998, net gains on the sales of interests in real estate were $3.0 million as compared to $1.7 million in 1997. In 1998, gains were recognized from the sales of interests in Punta Gorda Mall, Punta Gorda, FL, Ormond Beach Mall, Daytona Beach, FL and Charter Pointe Apartments in Altamonte Springs, FL. In 1997, gains resulted from sales of the Company's interest in Gateway Mall, St. Petersburg, FL offset by a loss on the sale of property in Margate, FL. Gross revenues from real estate increased by $17.7 million or 40% to $61.7 million for the year ended December 31, 1998, as compared to the year ended December 31, 1997. The 1998 period included $17.1 million of revenues attributable to new properties acquired. Of that amount, $10.8 million of revenues were attributable to Magnolia Mall and North Dartmouth Mall, which the Company acquired on September 30, 1997. The balance of the increase in revenues of $6.3 million was attributable to the 1998 acquisitions. Revenues from properties owned during both periods increased by $0.6 million primarily as a result of an increase in apartment revenues of $0.5 million. In 1998, property operating expenses increased by $4.6 million to $22.5 million. The 1998 period included $4.8 million of expenses attributable to new properties acquired. Of that increase, $3.0 million of expenses were attributable to Magnolia Mall and North Dartmouth Mall. The balance of the increase of $1.8 million was attributable to the 1998 acquisitions. Operating expenses from properties owned during both periods decreased by $0.2 million primarily due to decreases in operating costs for apartments. -30- In 1998, depreciation and amortization increased by $2.5 million to $9.4 million primarily as a result of depreciation of $2.2 million from the addition of Magnolia Mall and North Dartmouth Mall and the 1998 acquisitions. Depreciation and amortization for properties owned during both periods increased by $0.3 million. In 1998, interest expense increased by $0.3 million to $10.6 million. Interest expense attributable to mortgaged properties increased by $0.5 million due to the acquisition of Magnolia Mall, The Woods Apartments and Prince Georges Plaza, offset by the repayment of the mortgage on Cobblestone Apartments in December 1997. Interest expense incurred against the Company's Credit Facility decreased by $0.2 million. Equity in income of partnerships and joint ventures increased by $0.2 million to $6.0 million primarily as a result of the Company's purchase of a 50% interest in Oxford Valley Road Associates on September 30, 1997 and Springfield Mall, acquired during the second quarter of 1998, which together contributed $0.6 million for the period. Equity in the income of properties owned during both periods decreased by $0.3 million. This decrease was caused by a $0.6 million reduction from Whitehall Mall which was being redeveloped, offset by increases of $0.3 million from other joint ventures. In 1997, loss on early extinguishment of partnerships and joint venture debt of $1.2 million related to refinancing fees paid on Lehigh Valley Mall and Regency Apartments. Equity in net loss of PREIT-RUBIN, Inc. for the 1998 period was $0.7 million compared with income of $0.3 million for the 1997 period. Minority interest in the operating partnership increased $1.0 million as a result of the Units issued in connection with the Company's acquisition of The Rubin Organization and Units issued in connection with five acquisitions during 1998. In 1998, loss on early extinguishment of debt was due to a refinancing prepayment fee on Fox Run Apartments of $0.3 million. Calendar Year December 31, 1998 compared with Fiscal Year August 31, 1997 Net income for the calendar year ended December 31, 1998 before gains on sales of interests in real estate, increased 118% to $20.1 million from $9.2 million for the fiscal year 1997. In 1998, net gains on the sales of interests in real estate were $3.0 million as compared to $1.0 million in 1997. In 1998, gains were recognized from the sales of interests in Punta Gorda Mall, Punta Gorda, FL, Ormond Beach Mall, Daytona Beach, FL and Charter Pointe Apartments in Altamonte Springs, FL. In 1997, gains on sales of the Company's interest in shopping centers in Lancaster, Beaver Falls and Waynesburg, PA of $1.5 million were offset by a loss on sale of shopping center in Margate, FL of $0.4 million. Gross revenues from real estate increased by $21.5 million or 53% to $61.7 million for the year ended December 31, 1998, as compared to $40.2 million for the year ended August 31, 1997. The 1998 period included $20.5 million of revenues attributable to properties acquired. Of that amount, $14.2 million of revenues were attributable to Magnolia Mall and North Dartmouth Mall. The balance of the increase of $6.3 million was attributable to the 1998 acquisitions. Revenues from properties owned during both periods increased by $1.0 million primarily as a result of an increase in apartment revenues of $0.7 million. -31- In 1998, property operating expenses increased by $6.0 million to $22.5 million. The 1998 period included $6.1 million of expenses attributable to properties acquired. Of that increase, $4.3 million of expenses were attributable to Magnolia Mall and North Dartmouth Mall. The balance of the increase of $1.8 million was attributable to the 1998 acquisitions. Operating expenses from properties owned during both periods decreased by $0.1 million primarily due to decreases in operating costs for apartments. In 1998, depreciation and amortization increased by $3.1 million to $9.4 million primarily as a result of additional depreciation expense of $2.6 million from the acquisition of Magnolia Mall and North Dartmouth Mall in 1997 and the 1998 acquisitions. Depreciation and amortization from properties owned during both periods increased by $0.3 million. In 1998, interest expense increased by $1.5 million to $10.6 million. Interest expense attributable to properties increased by $3.8 million due to the acquisition of Magnolia Mall, The Woods Apartments and Prince Georges Plaza, offset by the repayment of the mortgage on Cobblestone Apartments in December 1997. Interest expense incurred against the Company's Credit Facility decreased by $2.3 million. Equity in income of partnerships and joint ventures increased by $1.6 million to $6.0 million as a result of the Company's purchase of a 50% interest in Oxford Valley Road Associates on September 30, 1997 and three other properties, which contributed $0.7 million for the period. Equity in the income of properties owned during both periods increased by $0.9 million. This increase was net of a $0.8 million decrease from Whitehall Mall which was being redeveloped. Equity in net loss of PREIT-RUBIN, Inc. for the 1998 period was $0.7 million. Minority interest in the operating partnership was $1.4 million as a result of the Units issued in connection with the Company's acquisition of The Rubin Organization and Units issued in connection with five 1998 acquisitions (see Notes 3 and 12 to the Consolidated Financial Statements). In 1998, loss on early extinguishment of debt was due to a refinancing prepayment fee on Fox Run Apartments of $0.3 million. Four-Month Periods Ended December 31, 1997 and 1996 Net income for the four months ended December 31, 1997 increased to $6.0 million from $4.9 million as reported in the comparable period in the prior year. Gross revenues from real estate increased by $3.9 million to $17.0 million for the four month period ended December 31, 1997 as compared to the same period in the prior year. The 1997 period included $3.5 million of revenues attributable to Magnolia Mall and North Dartmouth Mall. Revenues from properties owned during both periods increased by $0.3 million primarily as a result of an increase in apartment revenues. Operating expenses increased by $1.4 million to $6.9 million. The 1997 period included $1.3 million of expenses attributable to Magnolia Mall and North Dartmouth Mall. Operating expenses from properties owned during both periods increased by $0.1 million. Depreciation and amortization increased by $0.6 million to $2.7 million primarily as a result of the addition of the Magnolia Mall and North Dartmouth Mall properties of $0.4 million, and increased amortization of financing costs of approximately $0.1 million. Interest expense increased by $1.2 million to $4.3 million as a result of interest on borrowings against the Company's Credit Facility for acquisitions and working capital needs. -32- Equity in income of partnerships and joint ventures increased by $0.3 million to $2.1 million primarily as a result of the Company's acquisition of a 50% interest in Oxford Valley Road Associates on September 30, 1997 generating additional income of $0.1 million. Also, the 1996 period includes a prepayment penalty in the amount of $0.2 million due to the refinancing of debt for Lehigh Valley Mall. Equity in income of PREIT-RUBIN, Inc. for the 1997 period was $0.3 million. The gain on the sale of interest in real estate of $2.1 million in the 1997 period relates to the sale of the Company's 60% interest in Gateway Mall, St. Petersburg, Florida. The prior year gains of $1.5 million consist of the sale of the Company's 50% interest in three shopping centers in Pennsylvania. Minority interest in the operating partnership increased by $0.4 million to $0.4 million as a result of the Units issued in connection with the Company's acquisition of The Rubin Organization. Extraordinary loss of $0.3 million is due to the write-off of remaining deferred financing costs following the early extinguishment of the Company's previous credit facility. Liquidity and Capital Resources - ------------------------------- The Company expects to meet its short-term liquidity requirements generally through its available working capital and net cash provided by operations. The Company believes that its net cash provided by operations will be sufficient to allow the Company to make any distributions necessary to enable the Company to continue to qualify as a REIT under the Internal Revenue Code of 1986, as amended. The Company also believes that the foregoing sources of liquidity will be sufficient to fund its short-term liquidity needs for the foreseeable future, including capital expenditures, tenant improvements and leasing commissions. The Company expects to meet certain long-term liquidity requirements such as property acquisitions, scheduled debt maturities, renovations, expansions and other non-recurring capital improvements through long-term secured and unsecured indebtedness and the issuance of additional equity securities. The Company also expects to use the remaining funds available under the $150 million revolving credit facility (the "Credit Facility") to fund acquisitions, development activities and capital improvements on an interim basis. At December 31, 1999 the Company had borrowed $91 million against its Credit Facility and had pledged $7 million under the Credit Facility as collateral for several letters of credit. The proceeds of the $91 million in borrowings were used to fund 1997, 1998 and 1999 acquisitions and several development projects. The letters of credit were drawn to facilitate several development projects and a new acquisition. Of the unused portion of approximately $52 million, as of December 31, 1999, the Company's loan covenant restrictions allow the Company to borrow approximately an additional $23 million based on the existing property collateral pool. In order to secure additional funds for its acquisition and development activities, the Company is exploring a number of financing alternatives with the current bank group as well as other financial institutions and intermediaries. The Company expects these activities to be ongoing throughout 2000. -33- The Credit Facility - ------------------- The Company's operating partnership has entered into the Credit Facility with a group of banks led by First Union National Bank. The obligations of the Company's operating partnership under the Credit Facility have been guaranteed by the Company. During 1998, the Credit Facility's original maturity date was extended to December 31, 2000. The Credit Facility bears interest, at the borrower's election, at (i) the higher of First Union's prime rate, or the Federal Funds lending rate plus 0.5%, in each case as in effect from time to time, or (ii) the London Interbank Offered Rate (LIBOR) plus margins ranging from 1.1% to 1.7%, depending on the ratio of the Company's consolidated liabilities to gross asset value (the "Leverage Ratio"), each as determined pursuant to the terms of the Credit Facility. The Credit Facility contains affirmative and negative covenants customarily found in facilities of this type, as well as requirements that the Company maintain, on a consolidated basis: (i) a maximum Leverage Ratio of 65%; (ii) a maximum ratio of Senior Liabilities (as defined in the Credit Facility) to Mortgaged Asset Value (as defined in the Credit Facility) of 71% at December 31, 1999; (iii) minimum tangible net worth of $115 million plus 75% of cumulative net proceeds from the sale of equity securities; (iv) a minimum ratio of annualized consolidated property net operating income to total annual debt service of 1.40:1; and (v) a minimum ratio of annualized consolidated property net operating income to pro forma debt service of 1.30:1. During 1999, the Company executed the Third Amendment to the Credit Facility. In addition to the covenants indicated in the preceding paragraph, a new covenant, referred to as the "Minimum Mortgaged Asset Debt Service Ratio," was added. This covenant requires the Company to maintain the ratio of aggregated annualized net operating income for the Mortgaged Properties (as defined in the Third Amendment) to the product of the Indebtness (which includes any amounts due under the Credit Facility, including Letters of Credit) and 8.75% of at least 1.45 to 1 on December 31, 1999. The Third Amendment also required the recording of the mortgages, assignments of rents, leases, and profits, and UCC-1 Financing Statements that had been delivered by the Borrower with respect to those properties that, as of April 15, 1999 were part of the Unencumbered Property Pool (as defined in the Third Amendment). These nine properties, along with two additional properties added via the Third Amendment, are now referred to as the Mortgaged Properties. One of the Development Properties will be added to the Mortgaged Properties after the date of Substantial Completion (as defined in the Third Amendment). -34- Mortgage Notes - -------------- In addition to amounts due under the Credit Facility, during the next three years construction and mortgage loans, secured by properties owned by two partnerships in which the Company has an interest, mature by their terms. Balloon payments on these loans total $22.9 million of which the Company's proportionate share is $11.8 million. Construction and mortgage loans on properties wholly-owned by the Company also mature by their terms. Balloon payments on these loans total $21.7 million. In order to secure additional funds for its acquisition and development activities, on April 13, 1999, the Company concluded the financing of eight multifamily communities with $108.0 million of permanent, fixed-rate, long-term debt. With the financing, the Company replaced short-term floating rate debt with fixed rate, mortgage debt. The new debt carries a weighted average fixed interest rate of approximately 6.77%. The eight properties secure the non-recourse loans, which amortize over 30 years and mature in May 2009. Proceeds from these newly-placed loans were used to (i) repay approximately $88.0 million of the Credit Facility, (ii) pay off a short-term floating rate loan of approximately $17.0 million and (iii) fund approximately $3.0 million in closing costs. Commitments - ----------- At December 31, 1999, the Company had approximately $73 million committed to complete current development and redevelopment projects. Of this amount, approximately $40.0 million of construction financing has been placed. In connection with certain development properties, including those development properties acquired as part of the Company's acquisition of The Rubin Organization (see Note 3 to the Consolidated Financial Statements), the Company may be required to issue additional Units upon the achievement of certain financial results. Cash Flows - ---------- During the year ended December 31, 1999, the Company generated $32.3 million in cash flow from operating activities. Other sources and uses of cash flow included: (i) $120.5 million in net proceeds from mortgage notes payable, and (ii) $6.8 million proceeds from a construction loan payable: all of which was offset by (i) $47.9 million in net repayments of the Company's Credit Facility, (ii) $17.0 million of prepayments of mortgage notes payable, (iii) $3.7 million of other principal installments, and (iv) $27.6 million of distributions to shareholders and Unit holders. During the year ended December 31, 1999, the Company had net investing activities of $64.9 million including: (i) investments in wholly-owned real estate assets ($37.0 million), (ii) investments in property under development ($26.8 million), (iii) investments in partnerships and joint ventures ($8.3 million), (iv) investments in the affiliated management company ($2.1 million); all of which was offset by (i) cash proceeds from gains on sales of real estate interests of $5.5 million and (ii) cash distributions from partnerships and joint ventures in excess of equity in income of $3.8 million. -35- Contingent Liabilities - ---------------------- The Company along with certain of its joint venture partners has guaranteed debt totaling $6.2 million (see Note 4 to Consolidated Financial Statements). Also, the Company and its joint venture partner have jointly and severally guaranteed the construction loan payable on a developmment project. The balance of the loan at December 31, 1999 was $22.3 million and the remaining commitment from the lender is $43.7 million for a total credit line of $66.0 million. Interest Rate Protection - ------------------------ In order to reduce exposure to variable interest rates, the Company entered into a six-year interest rate swap agreement with First Union, on $20 million of indebtedness which fixes a rate of 6.12% per annum versus 30-day LIBOR until June 2001. Financial Instruments Sensitivity Analysis - ------------------------------------------ The analysis below presents the sensitivity of the market value of the Company's financial instruments to selected changes in the general level of market interest rates. In order to mitigate the impact of fluctuation in market interest rates, the Company`s derivative and other financial instruments consist of long-term debt (including current portion) and an interest rate swap agreement. All financial instruments are entered into for other than trading purposes and the net market value of these financial instruments combined is referred to as the net financial instrument position. As of December 31, 1999, the Company's consolidated debt portfolio consisted of $266.8 million in fixed rate mortgage notes and $91.0 million borrowed under its revolving Credit Facility. The Company has limited its exposure to increases in LIBOR on its floating rate debt by entering into a $20.0 million interest rate swap agreement which expires in June 2001 and carries a fixed interest rate of 6.12% versus 30-day LIBOR. Management does not foresee any significant changes in the Company's exposure to interest rate fluctuations or how such exposure will be managed in the near future. Changes in market interest rates have different impacts on the fixed and variable portions of the Company's debt portfolio. A change in market interest rates on the fixed portion of the debt portfolio impacts the net financial instrument position, however, it has no impact on interest incurred or cash flows. A change in market interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows, but does not impact the net financial instrument position. The sensitivity analysis, related to the fixed debt portfolio, assumes an immediate 100 basis point move in interest rates from their actual December 31, 1999 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the net financial instrument position of $13.5 million at December 31, 1999. A 100 basis point decrease in market interest rates would result in an increase in the net financial instrument position of $14.6 million at December 31, 1999. Based on the variable-rate debt included in the Company's debt portfolio, including an interest rate swap agreement, as of December 31, 1999, a 100 basis point increase in interest rates would result in an additional $0.7 million in interest incurred at December 31, 1999. A 100 basis point decrease would reduce interest incurred by $0.7 million at December 31, 1999. -36- Funds From Operations - --------------------- The Company computes Funds from Operations in accordance with standards established by NAREIT which may not be comparable to Funds from Operations reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than the Company. Funds from Operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company's financial performance or as an alternative to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make cash distributions. Funds from operations increased 12.5% to $38.9 million for the year ended December 31, 1999, as compared to $34.6 million in 1998. The increase is primarily due to an improvement in net operating income from residential properties and newly acquired properties in 1998 and 1999. Capital Expenditures - -------------------- During calendar 1999, the Company expended $3.6 million for capital expenditures; $3.3 million ($517 per unit owned adjusted for partnership interests) for multifamily communities and $0.3 million for shopping centers. The Company's policy is to capitalize expenditures for floor coverings, appliances and major exterior preparation and painting for apartments. During the year, $1.3 million ($229 per unit owned) was expended for floor covering and $0.65 million ($108 per unit owned) for appliances. Environmental Matters - --------------------- In 1994, the Company established a reserve of $0.6 million for environmental remediation costs. In addition, the Company received a credit of $0.4 million for environmental matters in connection with the acquisition of two properties. Since 1994 a total of $0.7 million was charged against the reserve. The Company also reduced the reserve by $0.2 million leaving a balance of $0.1 million, which is the Company's share of the estimated remaining environmental liability. There can be no assurance that these amounts will be adequate to cover future environmental costs. Year 2000 - --------- The Company expended approximately $0.2 million in connection with hardware, software and equipment upgrades and repairs relating to the Year 2000 issue. The Company did not incur any significant interruption of services in connection with the Year 2000, nor does the Company expect to incur any in the future. Competition - ----------- The Company's shopping centers compete with other shopping centers in their trade areas as well as alternative retail formats, including catalogues, home shopping networks and internet commerce. Apartment properties compete for tenants with other multifamily properties in their markets. Economic factors, such as employment trends and the level of interest rates, impact shopping center sales as well as a prospective tenant's choice to rent or own his/her residence. -37- Inflation - --------- Inflation can have many effects on the financial performance of the Company. Shopping center leases often provide for the payment of rents based on a percentage of sales which may increase with inflation. Leases may also provide for tenants to bear all or a portion of operating expenses which may reduce the impact of such increases on the Company. Apartment leases are normally for a one-year term which may allow the Company to seek increased rents as leases are renewed or when new tenants are obtained. Forward-Looking Statements - -------------------------- The matters discussed in this report, as well as news releases issued from time to time by the Company use forward-looking terminology such as "may," "will," "should," "expect," "anticipate," "estimate," "plan," or "continue" or the negative thereof or other variations thereon, or comparable terminology which constitute "forward-looking statements." Such forward-looking statements (including without limitation, information concerning the Company's planned acquisition, development and divestiture activities, short- and long-term liquidity position, ability to raise capital through public and private offerings of debt and/or equity securities, availability of adequate funds at reasonable cost, revenues and operating expenses for some or all of the properties, leasing activities, occupancy rates, changes in local market conditions or other competitive factors) involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company's results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. -38- Item 7A. Quantitative and Qualitative Disclosure About Market Risk See Item 7 under the heading "Financial Instruments Sensitivity Analysis" for a discussion of our market risk. Item 8. Financial Statements and Supplementary Data Our consolidated balance sheets as of December 31, 1999 and 1998 and the related consolidated statements of income, shareholders' equity and cash flows for the years ended December 31, 1999 and 1998, the four-month period ended December 31, 1997 and the fiscal year ended August 31, 1997, and the report of independent public accountants thereon and our summary of unaudited quarterly financial information for the calendar years ended December 31, 1999 and 1998 are set forth on pages F-1 through F-18 of this report. Item 9. Disagreements on Accounting and Financial Disclosure None. PART III Item 10. Trustees and Executive Officers of the Trust. The information required by Item 10 is incorporated by reference to, and will be contained in, our definitive proxy statement, which we anticipate will be filed no later than April 29, 2000, and thus we have omitted the Item in accordance with General Instruction G(3) to Form 10-K. -39- Item 11. Executive Compensation The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, which we anticipate will be filed no later than April 29, 2000, and thus we have omitted the item in accordance with General Instruction G(3) to Form 10-K. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, which we anticipate will be filed no later than April 29, 2000, and thus we have omitted the item in accordance with General Instruction G(3) to Form 10-K. Item 13. Certain Relationships and Related Transactions. The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, which we anticipate will be filed no later than April 29, 2000, and thus we have omitted the item in accordance with General Instruction G(3) to Form 10-K. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K The following documents are filed as part of this report:
(1) Financial Statements Report of Independent Public Accountants F-1 Consolidated Balance Sheets as of December 31, 1999 and 1998 F-2 Consolidated Statements of Income and Shareholders' Equity for the calendar years ended December 31, 1999 and 1998, the four-month period ended December 31, 1997 and for the fiscal year ended August 31, 1997 F-3 Consolidated Statements of Cash Flows for the calendar years ended December 31, 1999 and 1998, the four-month period ended December 31, 1997 and for the fiscal year ended August 31, 1997 F-4
-40-
Notes to Consolidated Financial Statements F-5 - F-15 (2) Financial Statement Schedules II - Valuation and Qualifying Accounts F-16 III - Real Estate and Accumulated Depreciation F-17 - F-18 All other schedules are omitted because they are not applicable, not required or because the required information is reported in the consolidated financial statements or notes thereto.
-41- (3) Exhibits 3.1 Trust Agreement as Amended and Restated on December 16, 1997, filed as Exhibit 3.2 to the Trust's Current Report on Form 8-K dated December 16, 1997, is incorporated herein by reference. 3.2 By-Laws of the Trust as amended through December 16, 1997, filed as exhibit 3.3 to the Trust's Current Report on Form 8-K dated December 17, 1997, is incorporated herein by reference. 4.1 First Amended and Restated Agreement of Limited Partnership, dated September 30, 1997, of PREIT Associates, L.P., filed as exhibit 4.15 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. 4.2 First Amendment to the First Amended and Restated Agreement of Limited Partnership, dated September 30, 1997, of PREIT Associates, L.P., filed as exhibit 4.1 to the Trust's Current Report on Form 10-Q for the quarterly period ended September 30, 1998, is incorporated herein by reference. 4.3 Second Amendment to the First Amended and Restated Agreement of Limited Partnership, dated September 30, 1997, of PREIT Associates, L.P., filed as exhibit 4.2 to the Trust's Current Report on Form 10-Q for the quarterly period ended September 30, 1998, is incorporated herein by reference. 4.4 Third Amendment to the First Amended and Restated Agreement of Limited Partnership, dated September 30, 1997, of PREIT Associates, L.P., filed as exhibit 4.3 to the Trust's Current Report on Form 10-Q for the quarterly period ended September 30, 1998, is incorporated herein by reference. 4.5 Rights Agreement dated as of April 30, 1999 between the Trust and American Stock Transfer and Trust Company, as Rights Agent, filed as exhibit 1 to the Trust's Registration Statement on Form 8-A dated April 29, 1999, is incorporated herein by reference. 10.1 Revolving Credit Agreement, dated September 30, 1997, among PREIT Associates, L.P. and the lending institutions named therein, filed as exhibit 4.12 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. 10.2 Form of Revolving Credit Note, dated September 30, 1997, filed as exhibit 4.13 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. -42- 10.3 Guaranty of the Trust, dated September 30, 1997, among the Trust and the lending institutions named therein, filed as exhibit 4.14 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. 10.4 Guaranty dated August 29, 1996 of the Trust in favor of CoreStates Bank, N.A., filed as exhibit 4.3 to the Trust's Annual Report on Form 10-K for its fiscal year ended August 31, 1996, is incorporated herein by reference. 10.5 Guaranty dated August 2, 1993 of the Trust in favor of CoreStates Bank, N.A., filed as exhibit 4.7 to the Trust's Annual Report on Form 10-K for its fiscal year ended August 31, 1995, is incorporated herein by reference. 10.6 Guaranty dated January 27, 1994 of the Trust in favor of CoreStates Bank, N.A., filed as exhibit 4.8 to the Trust's Annual Report on Form 10-K for its fiscal year ended August 31, 1995, is incorporated herein by reference. 10.7 Guaranty dated September 23, 1994 of the Trust in favor of CoreStates Bank, N.A., filed as exhibit 4.9 to the Trust's Annual Report on Form 10-K for its fiscal year ended August 31, 1995, is incorporated herein by reference. +10.8 Employment Agreement, dated as of January 1, 1990, between the Trust and Sylvan M. Cohen, filed as exhibit 10.1 to the Trust's Annual Report on Form 10-K for the fiscal year ended August 31, 1990, incorporated herein by reference. +10.9 Second Amendment to Employment Agreement, dated as of September 29, 1997, between the Trust and Sylvan M. Cohen, filed as exhibit 10.36 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. +10.10 Amended and Restated Employment Agreement, dated as of October 1, 1990, between the Trust and Dante J. Massimini, filed as exhibit 10.3 to the Trust's Annual Report on Form 10-K for the fiscal year ended August 31, 1990, is incorporated herein by reference. +10.11 Trust's 1990 Incentive Stock Option Plan, filed as Appendix A to Exhibit "A" to the Trust's Quarterly Report on Form 10-Q for the quarterly period ended November 30, 1990, is incorporated herein by reference. +10.12 Trust's Amended and Restated 1990 Stock Option Plan for Non-Employee Trustees, filed as Appendix A to the Trust's definitive proxy statement for the Annual Meeting of Shareholders on December 16, 1997 filed on November 18, 1997, is incorporated herein by reference. +10.13 Amendment No. 2 to the Trust's 1990 Stock Option Plan for Non-Employee Trustees, filed as exhibit 10.9 to the Trust's annual Report on Form 10-K for the fiscal year ended December 31, 1998, is incorporated herein by reference. +10.14 Employment Agreement dated as of December 14, 1993 between the Trust and Jonathan B. Weller, filed as exhibit 10.10 to the Trust's Annual Report on Form 10-K for the fiscal year ended August 31, 1994, is incorporated herein by reference. +10.15 The Trust's Amended Incentive and Non Qualified Stock Option Plan, filed as exhibit A to the Trust's definitive proxy statement for the Annual Meeting of Shareholders on December 15, 1994 filed on November 17, 1994, is incorporated herein by reference. +10.16 Amended and Restated 1990 Incentive and Non-Qualified Stock Option Plan of the Trust, filed as exhibit 10.40 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. -43- +10.17 Amendment No. 1 to the Trust's 1990 Incentive and Non-Qualified Stock Option Plan, filed as exhibit 10.16 to the Trust's Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated hereby by reference. +10.18 The Trust's 1993 Jonathan B. Weller Non Qualified Stock Option Plan, filed as exhibit B to the Trust's definitive proxy statement for the Annual Meeting of Shareholders on December 15, 1994 which was filed November 17, 1994, as incorporated herein by reference. +10.19 Employment Agreement dated as of January 1, 1997 between the Trust and Jeffrey Linn filed as exhibit 10.16 to the Trust's Annual Report on Form 10-K on November 28, 1997, is incorporated herein by reference. 10.20 PREIT Contribution Agreement and General Assignment and Bill of Sale, dated as of September 30, 1997, by and between the Trust and PREIT Associates, L.P., filed as exhibit 10.15 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. 10.21 Declaration of Trust, dated June 19, 1997, by Trust, as grantor, and Trust, as initial trustee, filed as exhibit 10.16 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. 10.22 TRO Contribution Agreement, dated as of July 30, 1997, among the Trust, PREIT Associates, L.P., and the persons and entities named therein, filed as exhibit 10.17 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. 10.23 First Amendment to TRO Contribution Agreement, dated September 30, 1997, filed as exhibit 10.18 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. 10.24 Contribution Agreement (relating to the Court at Oxford Valley, Langhorne, Pennsylvania), dated as of July 30, 1997, among the Trust, PREIT Associates, L.P., Rubin Oxford, Inc. and Rubin Oxford Valley Associates, L.P., filed as exhibit 10.19 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. 10.25 First Amendment to Contribution Agreement (relating to the Court at Oxford Valley, Langhorne, Pennsylvania), dated September 30, 1997, filed as exhibit 10.20 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. -44- 10.26 Contribution Agreement (relating to Northeast Tower Center, Philadelphia, Pennsylvania), dated as of July 30, 1997, among the Trust, PREIT Associates, L.P., Roosevelt Blvd. Co., Inc. and the individuals named therein, filed as exhibit 10.22 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. 10.27 First Amendment to Contribution Agreement (relating to Northeast Tower Center, Philadelphia, Pennsylvania), dated as of December 23, 1998, among the Trust, PREIT Associates, L.P., Roosevelt Blvd. Co., Inc. and the individuals named therein, filed as exhibit 2.2 to the Trust's Current Report on Form 8-K dated January 7, 1999, is incorporated herein by reference. 10.28 Contribution Agreement (relating to the pre-development properties named therein), dated as of July 30, 1997, among the Trust, PREIT Associates, L.P., and TRO Predevelopment, LLC, filed as exhibit 10.23 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. 10.29 First Amendment to Contribution Agreement (relating to the pre-development properties), dated September 30, 1997, filed as exhibit 10.24 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. 10.30 First Refusal Rights Agreement, effective as of September 30, 1997, by Pan American Associates, its partners and all persons having an interest in such partners with and for the benefit of PREIT Associates, L.P., filed as exhibit 10.25 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. 10.31 Contribution Agreement among the Woods Associates, a Pennsylvania limited partnership, certain general, limited and special limited partners thereof, PREIT Associates, L.P., a Delaware limited partnership, and the Trust dated as of July 24, 1998, as amended by Amendment #1 to the Contribution Agreement, dated as of August 7, 1998, filed as exhibit 2.1 to the Trust's Current Report on Form 8-K dated August 7, 1998, is incorporated herein by reference. 10.32 Purchase and Sale and Contribution Agreement dated as of September 17, 1998 by and among Edgewater Associates #3 Limited Partnership, an Illinois Limited partnership, Equity-Prince George's Plaza, Inc., an Illinois corporation, PREIT Associates, L.P., a Delaware limited partnership and PR PGPlaza LLC, a Delaware limited liability company, filed as exhibit 2.1 to the Trust's Current Report on Form 8-K dated September 17, 1998 is incorporated herein by reference. 10.33 Purchase and Sale Agreement dated as of July 24, 1998 by and between Oaklands Limited Partnership, a Pennsylvania limited partnership, and PREIT Associates, L.P. a Delaware limited partnership, filed as exhibit 2.1 to the Trust's Current Repot on Form 8-K dated August 27, 1998 is incorporated herein by reference. 10.34 Registration Rights Agreement, dated as of September 30, 1997, among the Trust and the persons listed on Schedule A thereto, filed as exhibit 10.30 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. 10.35 Registration Rights Agreement, dated as of September 30, 1997, between the Trust and Florence Mall Partners, filed as exhibit 10.31 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. 10.36 Letter Agreement, dated March 26, 1996, by and among The Goldenberg Group, The Rubin Organization, Inc., Ronald Rubin and Kenneth Goldenberg, filed as exhibit 10.32 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. -45- 10.37 Letter Agreement dated July 30, 1997, by and between The Goldenberg Group and Ronald Rubin, filed as exhibit 10.33 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. +10.38 Employment Agreement, dated September 30, 1997, between the Trust and Ronald Rubin, filed as exhibit 10.34 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. +10.39 Employment Agreement, dated September 30, 1997, between the Trust and Edward Glickman, filed as exhibit 10.35 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. +10.40 Trust Incentive Bonus Plan, effective as of January 1, 1998, filed as exhibit 10.37 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. +10.41 PREIT-RUBIN, Inc. Stock Bonus Plan Trust Agreement, effective as of September 30, 1997, by and between PREIT-RUBIN, Inc. and CoreStates Bank, N.A., filed as exhibit 10.38 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. +10.42 PREIT-RUBIN, Inc. Stock Bonus Plan, filed as exhibit 10.39 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. +10.43 1997 Stock Option Plan, filed as exhibit 10.41 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference. +10.44 Amendment No. 1 to the Trust's 1997 Stock Option Plan, filed as Exhibit 10.48 to the Trust's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, is incorporated herein by reference. 10.45 The Trust's Special Committee of the Board of Trustees' Statement Regarding Adjustment of Earnout Performance Benchmarks Under the TRO Contribution Agreement, dated December 29, 1998, filed as Exhibit 10.1 to the Trust's Current Report on Form 8-K dated December 18, 1998, is incorporated herein by reference. -46- +10.46 The Trust's 1998 Non-Qualified Employee Share Purchase Plan, filed as exhibit 4 to the Trust's Form S-3 dated January 6, 1999, is incorporated herein by reference. +10.47 Amendment No. 1 to the Trust's Non-Qualified Employee Share Purchase Plan, filed as exhibit 10.52 to the Trust's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, is incorporated herein by reference. +10.48 The Trust's Qualified Employee Share Purchase Plan, filed as exhibit 4 to the Trust's Form S-8 dated December 30, 1998, is incorporated herein by reference. +10.49 Amendment No. 1 to the Trust's Qualified Employee Share Purchase Plan, filed as exhibit 10.54 to the Trust's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, is incorporated herein by reference. +10.50 PREIT-RUBIN Inc. 1998 Stock Option Plan, filed as Exhibit 4 to the Trust's Form S-3 dated March 19, 1999, is incorporated herein by reference. +10.51 Amendment No. 1 to the PREIT-RUBIN, Inc. 1998 Stock Option Plan, filed as exhibit 10.56 to the Trust's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, is incorporated herein by reference. 10.52 Promissory Note, dated April 13, 1999, by and between the Registrant and GMAC Commercial Mortgage Corporation, a California corporation ("GMAC"), filed as exhibit 10.1 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.53 Mortgage and Security Agreement, dated April 13, 1999, by and between the Registrant and GMAC, filed as exhibit 10.2 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.54 Promissory Note, dated April 13, 1999, by and between PR Marylander LLC, a Delaware limited liability company ("PR Maryland"), and GMAC, filed as exhibit 10.3 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.55 Indemnity Deed of Trust and Security Agreement, dated April 13, 1999, by and between PR Marylander and GMAC, filed as exhibit 10.4 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. -47- 10.56 Indemnity Deed of Trust and Security Agreement, dated April 13, 1999, by and between PR Kenwood Gardens LLC, a Delaware limited liability company ("PR Kenwood Gardens"), and GMAC, filed as exhibit 10.5 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.57 Mortgage and Security Agreement, dated April 13, 1999, by and between PR Kenwood Gardens and GMAC, filed as exhibit 10.6 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.58 Promissory Note, dated April 13, 1999, by and between GP Stones Limited Partnership, a Florida limited partnership ("GP Stones"), and GMAC, filed as exhibit 10.7 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.59 Mortgage and Security Agreement, dated April 13, 1999, by and between GP Stones and GMAC, filed as exhibit 10.8 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.60 Promissory Note, dated April 13, 1999, by and between PR Boca Palms LLC, a Delaware limited liability company ("PR Boca Palms"), and GMAC, filed as exhibit 10.9 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.61 Mortgage and Security Agreement, dated April 13, 1999, by and between PR Boca Palms and GMAC, filed as exhibit 10.10 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.62 Promissory Note, dated April 13, 1999, by and between PR Pembroke LLC, a Delaware limited liability company ("PR Pembroke"), and GMAC, filed as exhibit 10.11 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.63 Mortgage and Security Agreement, dated April 13, 1999, by and between PR Pembroke and GMAC, filed as exhibit 10.12 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.64 Promissory Note, dated April 13, 1999, by and between PR Hidden Lakes LLC, a Delaware limited liability company ("PR Hidden Lakes"), and GMAC, filed as exhibit 10.13 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. -48- 10.65 Mortgage and Security Agreement, dated April 13, 1999, by and between PR Hidden Lakes and GMAC, filed as exhibit 10.14 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.66 Promissory Note, dated April 13, 1999, by and between PREIT Associates L.P., a Delaware limited partnership ("PREIT Associates"), and GMAC, filed as exhibit 10.15 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.67 Mortgage and Security Agreement, dated April 13, 1999, by and between PREIT Associates and GMAC, filed as exhibit 10.16 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. +10.68 The Trust's 1999 Equity Incentive Plan, filed as Appendix A to the Trust's definitive proxy statement for the Annual Meeting of Shareholders on April 29, 1999 filed on March 30, 1999, is incorporated herein by reference. 21 Listing of subsidiaries 23 Consent of Arthur Andersen LLP (Independent Public Accountants of the Trust). 27 Financial Data Schedule + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form. (b) Report on Form 8-K. None. -49- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. PENNSYLVANIA REAL ESTATE INVESTMENT TRUST Date: March 30, 2000 By: /s/ Jonathan B. Weller ---------------------- Jonathan B. Weller President and Chief Operating Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Sylvan M. Cohen and Jonathan B. Weller, or either of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents, and either of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents, or either of them or any substitute therefor, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: -50-
Name Capacity Date ---- -------- ---- /s/ Sylvan M. Cohen Chairman and Trustee March 30, 2000 - -------------------------- Sylvan M. Cohen /s/ Ronald Rubin Chief Executive Officer and Trustee March 30, 2000 - -------------------------- Ronald Rubin /s/ Jonathan B. Weller President, Chief Operating Officer and Trustee March 30, 2000 - -------------------------- Jonathan B. Weller /s/ George Rubin Trustee March 30, 2000 - -------------------------- George Rubin /s/ William R. Dimeling Trustee March 30, 2000 - -------------------------- William R. Dimeling /s/ Lee Javitch Trustee March 30, 2000 - -------------------------- Lee Javitch /s/ Leonard I. Korman Trustee March 30, 2000 - -------------------------- Leonard I. Korman /s/ Jeffrey P. Orleans Trustee March 30, 2000 - -------------------------- Jeffrey P. Orleans /s/Rosemarie B. Greco Trustee March 30, 2000 - -------------------------- Rosemarie B. Greco /s/ Edward Glickman Executive Vice President and Chief March 30, 2000 - -------------------------- Financial Officer (principal financial Edward Glickman officer) /s/ Dante J. Massimini Senior Vice President - Finance and Treasurer March 30, 2000 - ------------------------- (principal accounting officer) Dante J. Massimini
-51- Report of Independent Public Accountants To the Shareholders and Trustees of Pennsylvania Real Estate Investment Trust: We have audited the accompanying consolidated balance sheets of Pennsylvania Real Estate Investment Trust (a Pennsylvania Trust) and Subsidiaries as of December 31, 1999 and December 31, 1998 and the related consolidated statements of income, shareholders' equity and cash flows for the years then ended, the four-month period ended December 31, 1997 and the fiscal year ended August 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements for Lehigh Valley Mall Associates, a partnership in which the Company has a 50% interest which is reflected in the accompanying financial statements using the equity method of accounting. The equity in net income of Lehigh Valley Mall Associates represents 15%, 12%, 19% and 23% of net income for the years ended December 31, 1999 and 1998, the four-month period ended December 31, 1997 and for the fiscal year ended August 31, 1997, respectively. The financial statements of Lehigh Valley Mall Associates were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for Lehigh Valley Mall Associates, is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based upon our audit and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Pennsylvania Real Estate Investment Trust and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years ended December 31, 1999 and 1998, the four-month period ended December 31, 1997 and the fiscal year ended August 31, 1997, in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedules listed in the index to the financial statements and schedules on pages 40 and 41 are presented for the purpose of complying with the Securities and Exchange Commission's rules and are not a required part of the basic consolidated financial statements. The schedules have been subjected to the auditing procedures applied in our audit of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen LLP Philadelphia, Pennsylvania March 1, 2000 F-1 Consolidated Balance Sheets Calendar Year Calendar Year Ended 12/31 Ended 12/31 1999 1998 Assets Investments in real estate, at cost: Multifamily properties $236,859,000 $230,997,000 Retail properties 294,945,000 261,823,000 Industrial properties 5,078,000 5,078,000 Land and properties under development 40,639,000 11,508,000 ------------ ------------ Total investments in real estate 577,521,000 509,406,000 Less: Accumulated depreciation 84,577,000 71,129,000 ------------ ------------ 492,944,000 438,277,000 Investments in PREIT-RUBIN, Inc. 3,888,000 5,372,000 Advances to PREIT-RUBIN, Inc. 6,200,000 4,074,000 Investments in and advances to partnerships and joint ventures, at equity 17,873,000 13,439,000 ------------ ------------ 520,905,000 461,162,000 Less: Allowance for possible losses 528,000 1,572,000 ------------ ------------ 520,377,000 459,590,000 Other assets: Cash and cash equivalents 3,235,000 6,135,000 Rents and sundry receivables (net of allowance for doubtful accounts of $559,000 and $372,000, respectively) 6,249,000 3,498,000 Deferred costs, prepaid real estate taxes and expenses, net 17,729,000 12,392,000 ------------ ------------ $547,590,000 $481,615,000 ============ ============ Liabilities and Shareholders' Equity Mortgage notes payable $266,830,000 $167,003,000 Bank loan payable 91,000,000 135,273,000 Construction loan payable 6,804,000 -- Tenants' deposits and deferred rents 2,291,000 1,827,000 Accrued pension and retirement benefits 952,000 972,000 Accrued expenses and other liabilities 13,812,000 11,413,000 ------------ ------------ 381,689,000 316,488,000 ------------ ------------ Minority interest 32,489,000 28,045,000 ------------ ------------ Commitments and contingencies -- -- Shareholders' equity: Shares of beneficial interest, $1 par; authorized unlimited; issued and outstanding 13,337,549 and 13,299,723 at December 31, 1999 and 1998, respectively 13,338,000 13,300,000 Capital contributed in excess of par 145,697,000 145,103,000 Distributions in excess of net income (25,623,000) (21,321,000) ------------ ------------ Total shareholders' equity 133,412,000 137,082,000 ------------ ------------ $547,590,000 $481,615,000 ============ ============ The accompanying notes are an integral part of these statements. F-2
Consolidated Statements of Income Calendar Year Calendar Year 4-Month Period Fiscal Year Ended 12/31 Ended 12/31 Ended 12/31 Ended 8/31 1999 1998 1997 1997 Revenues Gross revenues from real estate $89,220,000 $61,745,000 $17,170,000 $40,231,000 Interest and other income 1,144,000 650,000 82,000 254,000 ----------- ----------- ----------- ----------- 90,364,000 62,395,000 17,252,000 40,485,000 ----------- ----------- ----------- ----------- Expenses Property operating expenses 31,783,000 22,519,000 6,915,000 16,487,000 Depreciation and amortization 14,223,000 9,406,000 2,695,000 6,259,000 General and administrative expenses 3,560,000 3,351,000 1,088,000 3,324,000 Interest expense 21,842,000 10,591,000 4,349,000 9,086,000 Provisions for losses on investments -- -- -- 500,000 ----------- ----------- ----------- ----------- 71,408,000 45,867,000 15,047,000 35,656,000 ----------- ----------- ----------- ----------- Income before equity in unconsolidated entities, gains on sales of interests in real estate, minority interest and extraordinary item 18,956,000 16,528,000 2,205,000 4,829,000 Equity in (loss) income of PREIT-RUBIN, Inc. (4,036,000) (678,000) 260,000 -- Equity in income of partnerships and joint ventures 6,178,000 5,985,000 2,101,000 4,337,000 Gains on sales of interests in real estate 1,763,000 3,043,000 2,090,000 1,069,000 ----------- ----------- ----------- ----------- Income before minority interest and extraordinary item 22,861,000 24,878,000 6,656,000 10,235,000 Minority interest (2,122,000) (1,423,000) (394,000) -- ----------- ----------- ----------- ----------- Income before extraordinary item 20,739,000 23,455,000 6,262,000 10,235,000 ----------- ----------- ----------- ----------- Extraordinary item-loss on early extinguishment of debt -- (270,000) (300,000) -- ----------- ----------- ----------- ----------- Net Income $20,739,000 $23,185,000 $5,962,000 $10,235,000 =========== =========== =========== =========== Net income per share: Basic $ 1.56 $ 1.74 $ .66 $ 1.18 Diluted $ 1.56 $ 1.74 $ .66 $ 1.18
Consolidated Statements of Shareholders' Equity For the Calendar Years Ended December 31, 1999 and 1998, the 4-Month Period Ended December 31, 1997 and the Fiscal Year Ended August 31, 1997
Shares of Beneficial Capital Contributed Distributions in Excess Interest $1 Par in Excess of Par of Net Income Balance, September 1, 1996 $8,676,000 $53,133,000 $(15,304,000) Net income -- -- 10,235,000 Shares issued upon exercise of options 9,000 166,000 -- Issuance of compensatory stock options -- 300,000 -- Distributions paid to shareholders ($1.88 per share) -- -- (16,316,000) ----------- ------------ ------------ Balance, August 31, 1997 8,685,000 53,599,000 (21,385,000) Net income -- -- 5,962,000 Shares issued upon exercise of options 4,000 64,000 -- New shares issued 4,600,000 91,083,000 -- Distributions paid to shareholders ($.47 per share) -- -- (4,082,000) ----------- ------------ ------------ Balance, December 31, 1997 13,289,000 144,746,000 (19,505,000) Net income -- -- 23,185,000 Shares issued upon exercise of options 11,000 196,000 -- Option sold to PREIT-RUBIN, Inc. -- 161,000 -- Distributions paid to shareholders ($1.88 per share) -- -- (25,001,000) ----------- ------------ ------------ Balance, December 31, 1998 13,300,000 145,103,000 (21,321,000) Net income -- -- 20,739,000 Shares issued under the employees' share purchase plans 23,000 270,000 -- Shares issued upon conversion of operating partnership units 15,000 324,000 -- Distributions paid to shareholders ($1.88 per share) -- -- (25,041,000) ----------- ------------ ------------ Balance, December 31, 1999 $13,338,000 $145,697,000 $(25,623,000) =========== ============ ============
The accompanying notes are an integral part of these statements. F-3 Consolidated Statements of Cash Flows
Calendar Year Calendar Year 4-Month Period Fiscal Year Ended 12/31 Ended 12/31 Ended 12/31 Ended 8/31 1999 1998 1997 1997 Cash Flows from Operating Activities: Net income $ 20,739,000 $ 23,185,000 $ 5,962,000 $ 10,235,000 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest in operating partnerships 2,122,000 1,423,000 394,000 -- Depreciation and amortization 14,223,000 9,406,000 2,695,000 6,259,000 Provision for doubtful accounts 210,000 194,000 -- -- Gains on sales of interests in real estate (1,763,000) (3,043,000) (2,090,000) (1,069,000) Provision for losses on investments -- -- -- 500,000 Issuance of compensatory stock options -- -- -- 300,000 Loss on early extinguishment of debt -- 270,000 300,000 -- Equity in loss (income) of PREIT-RUBIN, Inc. 4,036,000 678,000 (260,000) -- Decrease in allowance for possible losses (98,000) (197,000) (61,000) (710,000) Change in assets and liabilities, net of effects from acquisitions: Net change in other assets (7,634,000) (7,858,000) (2,926,000) 8,000 Net change in other liabilities 476,000 7,080,000 267,000 (304,000) ------------ ------------- ------------ ------------ Net cash provided by operating activities 32,311,000 31,138,000 4,281,000 15,219,000 ------------ ------------- ------------ ------------ Cash Flows from Investing Activities: Net investments in wholly-owned real estate (36,971,000) (150,793,000) (47,972,000) (3,901,000) Investments in property under development (26,802,000) (5,917,000) (1,246,000) -- Investments in partnerships and joint ventures (8,299,000) (15,030,000) (9,947,000) (2,649,000) Investments in and advances to PREIT-RUBIN, Inc. (2,126,000) (1,330,000) (1,448,000) -- Cash distributions from partnerships and joint ventures in excess of (less than) equity in income 3,789,000 10,328,000 (518,000) 17,605,000 Cash proceeds from sales of interests in partnerships 1,491,000 3,008,000 3,862,000 2,069,000 Cash proceeds from sales of wholly-owned real estate 4,045,000 -- -- -- Decrease in notes receivable -- -- -- 1,649,000 Deposits on agreement to purchase real estate -- -- -- (5,336,000) Deferred acquisition costs -- -- -- (1,488,000) ------------ ------------- ------------ ------------ Net cash (used in) provided by investing activities (64,873,000) (159,734,000) (57,269,000) 7,949,000 ------------ ------------- ------------ ------------ Cash Flows from Financing Activities: Principal installments on mortgage notes payable (3,672,000) (1,518,000) (9,318,000) (1,305,000) Proceeds from mortgage notes payable 120,500,000 68,314,000 -- -- Proceeds from construction loans payable 6,804,000 -- -- -- Prepayment of mortgage notes payable (17,000,000) (33,680,000) -- -- Net (payment) borrowing from revolving credit facility (47,873,000) 127,706,000 (29,309,000) (5,153,000) Payment of deferred financing costs (1,438,000) (1,076,000) (859,000) -- Shares of beneficial interest issued 293,000 206,000 96,829,000 175,000 Distributions paid to shareholders (25,041,000) (25,001,000) (4,082,000) (16,316,000) Distributions paid to OP unit holders (2,521,000) (1,484,000) (304,000) -- Distributions to minority partners (390,000) (60,000) (44,000) (200,000) ------------ ------------- ------------ ------------ Net cash provided by (used in) financing activities 29,662,000 133,407,000 52,913,000 (22,799,000) ------------ ------------- ------------ ------------ Net (decrease) increase in cash and cash equivalents (2,900,000) 4,811,000 (75,000) 369,000 Cash and cash equivalents, beginning of period 6,135,000 1,324,000 1,399,000 1,030,000 ------------ ------------- ------------ ------------ Cash and cash equivalents, end of period $ 3,235,000 $ 6,135,000 $ 1,324,000 $ 1,399,000 ============ ============= ============ ============ Supplemental Disclosure of Noncash Investing Activities: Accrual of acquisition costs $ -- $ -- $ -- $ 778,000 ============ ============= ============ ============
The accompanying notes are an integral part of these statements. F-4 Notes to Consolidated Financial Statements For the Calendar Years Ended December 31, 1999 and 1998, the Four-Month Period Ended December 31, 1997 and the Fiscal Year Ended August 31, 1997. 1. Summary of Significant Accounting Policies Nature of Operations Pennsylvania Real Estate Investment Trust (collectively with its subsidiaries, the "Company") is a fully integrated, self-administered and self-managed real estate investment trust ("REIT") which acquires, rehabilitates, develops, and operates retail and multifamily properties. Substantially all of the Company's properties are located in the Eastern United States, with concentrations in the Mid-Atlantic states and in Florida. The Company's interest in its properties is held through PREIT Associates, L.P. (the "Operating Partnership"). The Company is the sole general partner of the Operating Partnership and, as of December 31, 1999, the Company held a 90.7% interest in the Operating Partnership. The Operating Partnership holds a 95% economic interest in PREIT-RUBIN, Inc. (the "Management Company") through its ownership of 95% of the Management Company's stock, which represents all of the nonvoting common stock of the Management Company. Consolidation The Company consolidates its accounts and the accounts of the Operating Partnership and reflects the remaining interest in the Operating Partnership as minority interest. All significant intercompany accounts and transactions have been eliminated in consolidation. Investment in Management Company The Company's investment in the Management Company is accounted for using the equity method. See Notes 3 and 5 for further discussion. Partnership and Joint Venture Investments The Company accounts for its investment in partnerships and joint ventures which it does not control using the equity method of accounting. These investments, which represent 40% to 70% noncontrolling ownership interests, are recorded initially at the Company's cost and subsequently adjusted for the Company's net equity in income and cash contributions and distributions. Statements of Cash Flows The Company considers all highly liquid short-term investments with an original maturity of three months or less to be cash equivalents. Cash paid for interest was $22,101,000; $10,146,000; $4,412000; and $8,963,000 for the calendar years ended December 31, 1999 and 1998, the four-month period ended December 31, 1997, and the fiscal year ended August 31, 1997, respectively. At December 31, 1999 and 1998, cash and cash equivalents totaling $3,235,000 and $6,135,000, respectively included tenant escrow deposits of $724,000 and $514,000, respectively. Capitalization of Costs It is the Company's policy to capitalize interest and real estate taxes related to properties under development and to depreciate these costs over the life of the related assets in order to more properly match revenues and expenses. These items are capitalized for income tax purposes and amortized or depreciated in accordance with the provisions of the Internal Revenue Code. For the calendar years ended December 31, 1999 and 1998 and the four-month period ended December 31, 1997, the Company capitalized interest and real estate taxes of $2,311,000; $1,578,000 and $247,000. No interest or taxes were capitalized for the fiscal year ended August 31, 1997. The Company capitalized as deferred costs certain expenditures related to the financing and leasing of certain properties. Capitalized loan fees are being amortized over the term of the related loans and leasing commissions are being amortized over the term of the related leases. The Company capitalizes certain deposits associated with planned future purchases of real estate. These deposits are transferred to the properties upon consummation of the transaction. Depreciation The Company, for financial reporting purposes, depreciates its buildings, equipment and leasehold improvements over their estimated useful lives of 10 to 40 years, using the straight-line method of depreciation. For federal income tax purposes, the Company currently uses the straight-line method of depreciation and the useful lives prescribed by the Internal Revenue Code. Allowance for Possible Losses The Company reviews the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss for these assets is based on the estimated fair market value of the assets. During the fiscal year ended August 31, 1997, an impairment loss of approximately $500,000 was recorded following the expiration of an option to sell certain land parcels held by a partnership in which the Company held an equity interest. Benefit Plans The Company has provided pension benefits since 1970 for all employees, excluding the Chairman, for whom retirement benefits are provided in an employment contract. With regard to the Chairman's employment contract, no expense provision was required for the calendar years ended December 31, 1999 and 1998, the four-month period ended December 31, 1997 or for the fiscal year ended August 31, 1997. F-5 Derivative Financial Instruments The Company at times enters into interest rate swap and cap agreements in order to manage interest rate exposure on certain floating rate debt. When interest rates change, the differential to be paid or received is accrued as interest expense and is recognized over the life of the swap agreements. The costs of cap transactions are deferred and amortized over the contract period. The amortized costs of cap transactions and interest income and interest expense on swap transactions are included in mortgage and bank loan interest. The Financial Accounting Standards Board has issued SFAS No. 133, "Accounting For Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Company will be required to adopt this statement effective as of January 1, 2001. The Company does not expect the adoption of this Statement to have a material impact on its financial position or results of operations. Percentage Rental Income Starting in the second quarter of 1998, the Company began recording percentage rental income for shopping center leases in accordance with the Emerging Issues Task Force guidance on recording contingent rental income. Prior to that date, the Company recorded percentage rental income on a pro rata basis over the annual lease period if the achievement of the specific sales target was probable (see Note 13). Income Taxes The Company has elected to qualify as a real estate investment trust under Sections 856-860 of the Internal Revenue Code and intends to remain so qualified. Accordingly, no provision for federal income taxes has been reflected in the accompanying financial statements. Earnings and profits, which determine the taxability of distributions to shareholders, will differ from net income reported for financial reporting purposes due to differences in cost basis, differences in the estimated useful lives used to compute depreciation and differences between the allocation of the Company's net income and loss for financial reporting purposes and for tax reporting purposes. The Company is subject to a federal excise tax computed on a calendar year. The excise tax equals 4% of the excess, if any, of 85% of the Company's ordinary income plus 95% of the Company's capital gain net income for the calendar year over cash distributions during the calendar year, as defined. The Company has in the past distributed a substantial portion of its taxable income in the subsequent fiscal year and may also follow this policy in the future. No provision for excise tax was made for the calendar years ended December 31, 1999 and 1998, the four months ended December 31, 1997 or for the fiscal year ended August 31, 1997 as no tax was due. The tax status of distributions paid to shareholders was composed of the following for the calendar years ended December 31, 1999, 1998 and 1997: Calendar Year Ended Calendar Year Ended Calendar Year Ended 12/31/99 12/31/98 12/31/97 Ordinary income $1.67 $1.63 $1.66 Capital gains .21 .25 .22 -------- -------- -------- $1.88 $1.88 $1.88 ======== ======== ======== The Management Company is subject to federal, state and local income taxes. The operating results of the Management Company include a provision or benefit for income taxes. Tax benefits are recorded by the Management Company to the extent realizable. Comprehensive Income Net income as reported by the Company reflects total comprehensive income for the calendar year ended December 31, 1999 and 1998, for the four-month period ended December 31, 1997 and for the fiscal year ended August 31, 1997. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain prior period amounts have been reclassified to conform with the current year presentation. 2. Change in Fiscal Year-End On October 14, 1997, the Company announced its intention to change its fiscal year-end from August 31 to December 31. On February 17, 1998, the Company filed a Transition Report on Form 10-Q which included its results for the period September 1, 1997 through December 31, 1997 and the comparable period. Listed below is unaudited income statement information with respect to the four-month period ended December 31, 1996: 4--Month Period Ended 12/31/96 Revenues $13,397,000 Net income $ 4,842,000 Basic income per share $ .56 Diluted income per share $ .56 F-6 3. The TRO Transaction On September 30, 1997, the Company completed a series of related transactions pursuant to which the Company: (i) transferred substantially all of its real estate interests to PREIT Associates, L.P. of which the Company is the sole general partner; (ii) the Operating Partnership acquired all of the non-voting common shares of The Rubin Organization, Inc. ("TRO"), a commercial real estate development and management firm (renamed "PREIT-RUBIN, Inc."), constituting 95% of the total equity of PREIT-RUBIN, Inc. in exchange for the issuance of 200,000 Class A Operating Partnership ("OP") Units; (iii) the Operating Partnership acquired the interests of certain affiliates of TRO ("TRO Affiliates") in The Court at Oxford Valley, Magnolia Mall, North Dartmouth Mall and Springfield Park; (iv) the Operating Partnership agreed to acquire the interests of TRO Affiliates in Hillview Shopping Center and Northeast Tower Center, at prices based upon a pre-determined formula; and (v) the Operating Partnership acquired the development rights of certain TRO Affiliates, subject to related obligations, in Christiana Power Center (Phases I and II), Red Rose Commons and Blue Route Metroplex. Subsequent to that date, by mutual agreement with the TRO affiliates, the Operating Partnership did not acquire Hillview Shopping Center. The following pro forma financial information of the Company for the four-month period ended December 31, 1997 and the fiscal year ended August 31, 1997 gives effect to the acquisitions of the properties as if the purchases had occurred on September 1, 1996. 4-Month Period Ended Fiscal Year Ended (Unaudited) 12/31/97 8/31/97 Pro forma total revenues $18,292,000 $53,209,000 Pro forma net income $ 6,692,000 $10,459,000 Basic pro forma net income per common share $ .71 $ 1.21 Diluted pro forma net income per common share $ .71 $ 1.20 The pro forma financial information presented within this footnote is not necessarily indicative of the results which actually would have occurred if the acquisitions had been consummated on September 1, 1996, nor does the pro forma information purport to represent the results of operations for future periods. As part of the September 30, 1997 transactions discussed above, the Company entered into a contribution agreement (the "TRO Contribution Agreement") which includes a provision to issue up to 800,000 additional Class A OP units over the five-year period beginning October 1, 1997 and ending September 30, 2002 according to a formula based upon the Company's adjusted funds from operations per share during the five-year period. The TRO Contribution Agreement establishes "hurdle" and "target" levels set forth for the Company's adjusted funds from operations, as defined in the TRO Contribution Agreement, per share during specified earn-out periods to determine whether, and to what extent, the contingent OP units will be issued. The Company intends to account for the issuance of contingent OP units as additional purchase price when such amounts are determinable. For the four months ended December 31, 1997, 32,500 OP units were earned, resulting in additional purchase price of approximately $830,000. For the year ended December 31, 1998, 130,000 OP units were earned resulting in additional purchase price of approximately $2.5 million. For the year ended December 31, 1999, 167,500 OP units were earned resulting in additional purchase price of approximately $2.4 million. Pursuant to the terms of the partnership agreement, the limited partners of the Operating Partnership received a conversion right, which enables each limited partner to convert his/her interest in the Operating Partnership into shares of beneficial interest or cash, at the election of the Company on a one for one basis beginning one year following the respective issue date. In 1999, a former TRO partner converted approximately 15,000 OP units to shares of beneficial interest for total consideration of $339,000. Certain OP units issued in connection with the acquisition of Magnolia Mall can be converted at the option of the limited partner at any time after issuance. All of the acquisitions described above have been recorded by the Company using the purchase method of accounting. The Company accounts for its noncontrolling investment in PREIT-RUBIN, Inc. using the equity method. The excess of the purchase price of PREIT-RUBIN, Inc. over the fair value of net assets acquired is being amortized over 35 years. The following table summarizes the consideration paid to acquire the assets and businesses described above:
Class A Cash Paid Net Liabilities Other Total OP Units (Received) Assumed Transaction Costs Purchase Price Investment in PREIT-RUBIN, Inc.(1) $10,410,000 $ (878,000) $ -- $ 793,000 $ 10,325,000 Investment in The Court at Oxford Valley 5,458,000 683,000 -- 688,000 6,829,000 Magnolia Mall 5,000,000 15,165,000 25,154,000 977,000 46,296,000 North Dartmouth Mall -- 35,000,000 -- 986,000 35,986,000 Development Properties (See Note 11) -- 6,446,000 -- 1,859,000 8,305,000 ----------- ----------- ----------- ---------- ------------ $20,868,000 $56,416,000 $25,154,000 $5,303,000 $107,741,000 =========== =========== =========== ========== ============
(1) Includes value of OP units issued on September 30, 1997 and issued and accrued in subsequent earn-out periods as described above. F-7 4. Investments in Partnerships & Joint Ventures The following table presents summarized financial information as to the Company's equity in the assets and liabilities of 16 and 19 partnerships and joint ventures as of December 31, 1999 and 1998, respectively and 2 properties under development at December 31, 1999 and 1998:
Calendar Year Ended Calendar Year Ended 12/31/99 12/31/98 Assets Investments in real estate, at cost: Multifamily properties $ 56,112,000 $ 54,396,000 Industrial property -- 1,275,000 Retail properties 212,238,000 185,900,000 Properties under development 38,766,000 25,601,000 Land -- 926,000 ------------ ------------ Total investments in real estate 307,116,000 268,098,000 Less: Accumulated depreciation 70,520,000 64,478,000 ------------ ------------ 236,596,000 203,620,000 Cash and cash equivalents 7,952,000 7,107,000 Deferred costs, prepaid real estate taxes and other, net 43,677,000 34,923,000 ------------ ------------ Total assets 288,225,000 245,650,000 ------------ ------------ Liabilities and Partners' Equity Mortgage notes payable 231,611,000 218,278,000 Bank loans payable -- 3,260,000 Construction loans payable 22,298,000 -- Other liabilities 16,707,000 9,675,000 ------------ ------------ Total liabilities 270,616,000 231,213,000 ------------ ------------ Net equity (deficit) 17,609,000 14,437,000 Less: Partners' share (264,000) 998,000 ------------ ------------ Investment in and advances to partnerships and joint ventures $ 17,873,000 $ 13,439,000 ============ ============
Mortgage notes payable, which are secured by 13 of the related properties, are due in installments over various terms extending to the year 2016 with interest rates ranging from 6.55% to 8.35% with an average interest rate of 7.53% at December 31, 1999. Principal payments are due as follows: Years Ended 12/31 2000 $ 4,895,000 2001 4,712,000 2002 5,204,000 2003 26,648,000 2004 5,021,000 2005 and thereafter 185,131,000 ------------ $231,611,000 ============ The liability under each mortgage note is limited to the particular property except for a loan with a balance of $6,194,000 which is guaranteed by the partners of the respective partnerships, including the Company. Also, the Company and its joint venture partner have jointly and severally guaranteed the construction loan payable on a development project. The balance of the loan at December 31, 1999 is $22,298,000 and the remaining commitment from the lender is $43,702,000 for a total credit line of $66,000,000. At December 31, 1999 this loan bears interest at the London Interbank Offered Rate ("LIBOR") plus 2.0% or 8.46%. The loan matures in May 2001. The Company's investments in certain partnerships and joint ventures reflect cash distributions in excess of the Company's net investments totaling $1,905,000; $1,824,000; $5,898,000 and $5,833,000 for the calendar years ended December 31, 1999 and 1998, the four-month period ended December 31, 1997 and the fiscal year ended August 31, 1997, respectively. The Company is generally entitled to a priority return on these investments. The following table summarizes the Company's equity in income for the calendar years ended December 31, 1999 and 1998, the four-month period ended December 31, 1997 and the fiscal year ended August 31, 1997:
Calendar Year Ended Calendar Year Ended 4-Month Period Ended Fiscal Year Ended 12/31/99 12/31/98 12/31/97 8/31/97 Equity In Income of Partnerships and Joint Ventures Gross revenues from real estate: $58,817,000 $57,792,000 $19,258,000 $52,446,000 ----------- ----------- ----------- ----------- Expenses: Property operating expenses 19,785,000 20,662,000 7,122,000 20,774,000 Mortgage and bank loan interest 17,475,000 16,647,000 5,205,000 14,908,000 Depreciation and amortization 9,131,000 8,348,000 2,609,000 6,978,000 ----------- ----------- ----------- ----------- 46,391,000 45,657,000 14,936,000 42,660,000 ----------- ----------- ----------- ----------- 12,426,000 12,135,000 4,322,000 9,786,000 Partners' share (6,248,000) (6,150,000) (2,221,000) (5,449,000) ----------- ----------- ----------- ----------- Equity in income of partnerships and joint ventures $6,178,000 $5,985,000 $2,101,000 $4,337,000 =========== =========== =========== ===========
The Company has a 50% partnership interest in Lehigh Valley Mall Associates which is included in the amounts above. Summarized financial information as of December 31, 1999 and 1998, the four-month period ended December 31, 1997 and the fiscal year ended August 31, 1997 for this investment which is accounted for by the equity method is as follows:
Calendar Year Ended Calendar Year Ended 4-Month Period Ended Fiscal Year Ended 12/31/99 12/31/98 12/31/97 8/31/97 Total assets $23,283,000 $24,093,000 $24,943,000 $24,645,000 Mortgages payable 51,518,000 52,369,000 53,157,000 53,406,000 Revenues 17,296,000 15,669,000 4,266,000 14,840,000 Property operating expenses 6,057,000 5,074,000 1,508,000 4,657,000 Interest expense 4,103,000 4,176,000 1,289,000 4,638,000 Net income 6,356,000 5,642,000 2,313,000 4,660,000 Equity in income of partnership 3,178,000 2,821,000 1,157,000 2,330,000
F-8 5. Investment in PREIT-RUBIN, Inc. PREIT-RUBIN, Inc. ("PRI") is responsible for various activities, including management, leasing and real estate development of certain of the Company's properties and for properties on behalf of third parties. Total management fees paid by the Company's properties to PRI are included in property operating expenses in the accompanying consolidated statements of income and amounted to $634,000; $249,000 and $73,000 for the calendar years ended December 31, 1999 and 1998 and for the four-month period ended December 31, 1997. The Company's properties also paid leasing and development fees to PRI totaling $477,000; $1,100,000 and $18,000 for the calendar years ended December 31, 1999 and 1998 and the four-month period ended December 31, 1997. Leasing and development fees paid by the Company's properties to PRI are capitalized and amortized to expense in accordance with the Company's normal accounting policies as described in Note 1. Intercompany profits earned by PRI related to such activities are deferred and will be recognized as income over these same periods in order to properly match revenues and expenses. In July 1998, PRI issued 131,500 non-qualified stock options to its employees ("PRI options") to purchase shares of beneficial interest in the Company at a price equal to fair market value of the shares ($23.85) on the grant date. The options are exercisable over a four year period and vest in equal annual installments commencing July 15, 1999 and on each anniversary thereof. At the same time, the Company sold an option to PRI which will enable PRI to purchase an equal number of shares from the Company with the same terms and conditions as the PRI options. The purchase price for the option was determined based on the Black-Scholes option pricing model and was valued at $1.20 per option. There were no stock options issued in 1999. PRI also provides management, leasing and development services for partnerships and other ventures in which certain officers of the Company and PRI have either direct or indirect ownership interests. Total revenues earned by PRI for such services were $3,593,000 for the calendar year ended December 31, 1999, $3,489,000 for the calendar year ended December 31, 1998 and $1,419,000 for the four-month period ended December 31, 1997. As of December 31, 1999 and 1998, $988,000 and $1,682,000, respectively, was due from these affiliates. Of these amounts, approximately $670,000 and $1,682,000, respectively, were collected subsequent to December 31, 1999 and 1998. PRI also leases office space from an affiliate of certain officers of the Company and PRI. Total rent expense under this lease, which expires in 2010, was $649,000; $613,000 and $143,000 for the calendar years ended December 31, 1999 and 1998 and for the four-month period ended December 31, 1997, respectively. Minimum rental payments under this lease are $770,000 per year from 2000 to 2010. Summarized unaudited financial information for PRI as of and for the calendar years ended December 31, 1999 and 1998 and the four-month period ended December 31, 1997 is as follows:
Calendar Year Ended Calendar Year Ended 4-Month Period Ended (Unaudited) 12/31/99 12/31/98 12/31/97 Total assets $ 7,185,000 $12,142,000 $13,859,000 =========== =========== =========== Management fees $ 4,526,000 $ 4,700,000 $ 1,377,000 Leasing commissions 5,312,000 8,183,000 1,877,000 Development fees 691,000 1,539,000 124,000 Other revenues 4,382,000 4,131,000 2,334,000 ----------- ----------- ----------- Total revenue $14,911,000 $18,553,000 $ 5,712,000 =========== =========== =========== Net income (loss) $(4,237,000) $ (707,000) $ 303,000 =========== =========== =========== Company's share of net income (loss) $(4,036,000) $ (678,000) $ 260,000 =========== =========== ===========
- -------------------------------------------------------------------------------- 6. Mortgage Notes, Bank and Construction Loans Payable Mortgage Notes Payable Mortgage notes payable which are secured by 18 of the Company's properties are due in installments over various terms extending to the year 2025 with interest at rates ranging from 5.90% to 9.50% with an average interest rate of 7.50% at December 31, 1999. Principal payments are due as follows: Years Ended 12/31 2000 $ 4,436,000 2001 4,776,000 2002 5,105,000 2003 11,486,000 2004 5,498,000 2005 and thereafter 235,529,000 ------------ $266,830,000 ============ The fair value of the mortgage notes payable was approximately $253,000,000 at December 31, 1999 based on year-end interest rates and market conditions. Construction Loan Payable The Company has a construction loan outstanding with a balance of $6,804,000 at December 31, 1999. The construction loan bears interest at the prime rate of 8.5% at December 31, 1999. The loan is secured by a first mortgage on the property under development. The construction loan has an additional $23,196,000 available under the total commitment at $30,000,000. Credit Facility On September 30, 1997, the Operating Partnership entered into a $150 million revolving credit facility (the "Credit Facility"). The obligations of the Operating Partnership under the Credit Facility have been guaranteed by the Company. The Credit Facility was for an initial term of two years and during 1998 the maturity date was extended to December 31, 2000. The Credit Facility bears interest, at the borrowers' election, at (i) the higher of prime rate, or the Federal Funds lending rate plus .5%, or (ii) the London Interbank Offered Rate plus margins ranging from 1.1% to 1.7%, depending on the Company's consolidated Leverage Ratio, as defined. F-9 As of December 31, 1999, the Operating Partnership had $91 million outstanding on the Credit Facility. The weighted average interest rate based on amounts borrowed on the Credit Facility was 6.95% and 7.06% for the calendar years ended December 31, 1999 and 1998, respectively and 7.48% for the four-month period ended December 31, 1997. The Credit Facility requires the Company to maintain ongoing compliance with a number of customary financial and other covenants, including leverage ratios based on gross asset value, fixed charge coverage ratios and a minimum tangible net worth requirement. During 1999, the Company amended the Credit Facility. A minimum mortgaged asset debt service coverage ratio was added. Also, the amendment required the recording of the mortgages, assignments of rents, leases, and profits, and UCC-1 Financing Statements that had been delivered by the Borrower with respect to properties that, as of April 15, 1999 were encumbered. These nine properties, along with two additional properties added via the amendment, are now referred to as the Mortgaged Properties. One of the Development Properties will be added to the Mortgaged Properties after it is substantially completed. As of December 31, 1999, the Company was in compliance with all debt covenants. The Company has limited its exposure to increases in LIBOR on $20,000,000 of its floating rate debt by entering into a swap agreement which fixes a rate of 6.12% versus 30-day LIBOR through June 2001. In the event that the Company wanted to terminate the swap agreement referred to above, the amount which would be receivable at December 31, 1999 was approximately $84,000. The Company is exposed to credit loss in the event of nonperformance by the counterparty to the agreement; however, the Company does not anticipate nonperformance by the counterparty. During the calendar year ended December 31, 1998, the Company incurred a prepayment penalty of $270,000 in connection with a mortgage refinancing. During the four-month period ended December 31, 1997, the Company wrote off unamortized deferred financing costs of $300,000 in connection with the refinancing of its Credit Facility. These amounts have been reflected as extraordinary items in the accompanying consolidated statements of income for the respective periods. 7. Net Income Per Share Basic Earnings Per Share ("EPS") is based on the weighted average number of common shares outstanding during the year. Diluted EPS is based on the weighted average number of shares outstanding during the year, adjusted to give effect to common share equivalents. A reconciliation between basic and diluted EPS is shown below (in thousands, except per share data).
Calendar Year Ended 12/31/99 Calendar Year Ended 12/31/98 Basic Diluted Basic Diluted Income before extraordinary item $20,739 $20,739 $23,455 $23,455 Extraordinary item -- -- (270) (270) ------- ------- ------- ------- Net income $20,739 $20,739 $23,185 $23,185 ======= ======= ======= ======= Weighted average shares outstanding 13,318 13,318 13,297 13,297 Effect of share options issued -- -- -- 17 ------- ------- ------- ------- Total weighted average shares outstanding 13,318 13,318 13,297 13,314 ======= ======= ======= ======= Income per share before extraordinary item $ 1.56 $ 1.56 $ 1.76 $ 1.76 Extraordinary item per share -- -- (.02) (.02) ------- ------- ------- ------- Net income per share $ 1.56 $ 1.56 $ 1.74 $ 1.74 ======= ======= ======= =======
[RESTUB]
4-Month Period Ended 12/31/9 Fiscal Year Ended 8/31/97 Basic Diluted Basic Diluted Income before extraordinary item $6,262 $6,262 $10,235 $10,235 Extraordinary item (300) (300) -- -- ------ ------ ------- ------- Net income $5,962 $5,962 $10,235 $10,235 ====== ====== ======= ======= Weighted average shares outstanding 9,049 9,049 8,679 8,679 Effect of share options issued -- 50 -- 25 ------ ------ ------- ------- Total weighted average shares outstanding 9,049 9,099 8,679 8,704 ====== ====== ======= ======= Income per share before extraordinary item $ .69 $ .69 $ 1.18 $ 1.18 Extraordinary item per share (.03) (.03) -- -- ------ ------ ------- ------- Net income per share $ .66 $ .66 $ 1.18 $ 1.18 ====== ====== ======= =======
- -------------------------------------------------------------------------------- 8. Benefit Plans The Company maintains a 401(k) Plan (the "Plan") in which substantially all of the officers and employees are eligible to participate. The Plan permits eligible participants, as defined in the plan agreement, to defer up to 15% of their compensation, and the Company, at its discretion, may match a percentage of the employees' contributions. The employees' contributions are fully vested and contributions from the Company vest in accordance with an employee's years of service as defined in the plan agreement. The Company's contributions to the Plan for the calendar years ended December 31, 1999 and 1998, the four-month period ended December 31, 1997 and for the fiscal year ended August 31, 1997 were $ 34,000; $29,000; $43,000; and $41,000, respectively. The Company also maintains a Supplemental Retirement Plan (the "Supplemental Plan") covering certain senior management employees. The Supplemental Plan provides eligible employees through normal retirement date, as defined in the plan agreement, a benefit amount similar to that which would have been received under the provisions of a pension plan which was terminated in 1994. Contributions due by the Company under the provisions of this plan were $62,000; $60,000; $22,000 and $92,000 for the calendar years ended December 31, 1999 and 1998, the four-month period ended December 31, 1997 and for the fiscal year ended August 31, 1997, respectively. The Company and PRI also each maintain share purchase plans through which Company and PRI employees may purchase shares of beneficial interest at a discount of the fair market value. In 1999, 23,000 shares were purchased for total consideration of $293,000. F-10 9. Stock Option Plans In December 1990, the shareholders approved an incentive stock option plan for key employees (the "Employees Plan") and a stock option plan for nonemployee trustees (the "Nonemployee Trustees Plan"), covering 200,000 and 100,000 shares of beneficial interest, respectively. Under the terms of the plans, the purchase price of shares subject to each option granted will be at least equal to the fair market value of the shares on the date of grant. Options under the incentive stock option plan may be exercised as determined by the Company, but in no event later than 10 years from the date of grant. In December 1993, the Board of Trustees amended the incentive stock option plan for key employees, to increase the number of shares subject to option to 400,000 shares, to change the name of the plan to the "1990 Incentive and Non-Qualifying Stock Option Plan" and to expand some provisions of the plan. The stock option plan for nonemployee trustees provides for annual grants of 2,500 options (becoming exercisable in four equal installments). The options expire 10 years after the date of grant. In December 1993, the Board of Trustees adopted a nonqualifying stock option plan covering 100,000 shares. The Company granted options on February 1, 1994 having a term of 10 years and subject to the other terms and conditions set forth in the plan. All 100,000 shares are outstanding at December 31, 1999. On September 30, 1997, the Company adopted an Incentive and Non-Qualified Stock Option Plan (the "1997 Stock Option Plan") in connection with the TRO Transaction. Options on 455,000 Shares were granted to former TRO officers and employees on September 30, 1997 at an exercise price of $25.41 per share. All options granted on September 30, 1997 vest in four equal annual installments commencing January 1, 1999, and on each anniversary date thereof. In April, 1999, the Company adopted an Equity Incentive Plan (the "1999 Equity Incentive Plan"). Options to purchase approximately 400,000 shares are available under the 1999 Equity Incentive Plan, including all forfeited options and all unallocated options left over from the Company's 1993 Stock Option Plan and 1997 Stock Option Plan. As of December 31, 1999, no options had been issued under the 1999 Equity Incentive Plan. See Note 5 for a discussion of stock options at the Management Company. Changes in options outstanding are as follows:
1997 1993 Employees Nonemployee Exercise Price Stock Option Plan Stock Option Plan Plan Trustees Plan Options outstanding at 8/31/97 $15.75-$25.375 -- 100,000 340,125 38,250 -------------- -------- ------- ------- ------ Options granted $25.41 455,000 -- -- Options exercised $15.75-$20.375 -- -- -- (3,750) -------------- -------- ------- ------- ------ Options outstanding at 12/31/97 $15.75-$25.41 455,000 100,000 340,125 34,500 -------------- -------- ------- ------- ------ Options granted $23.85 -- -- 17,500 5,000 Options exercised $18.00-$20.375 -- -- (5,875) (5,000) Options forfeited $18.00-$22.75 (23,000) -- (3,375) -- -------------- -------- ------- ------- ------ Options outstanding at 12/31/98 $15.75-$25.41 432,000 100,000 348,375 29,500 -------------- -------- ------- ------- ------ Options granted -- -- -- -- 5,000 Options exercised -- -- -- -- -- Options forfeited $18.00-$25.41 (72,000) -- (500) (5,500) -------------- -------- ------- ------- ------ Options outstanding at 12/31/99 $15.75-$25.41 360,000 100,000 347,875 24,000 ============== ======== ======= ======= ======
At December 31, 1999, options for 513,500 shares of beneficial interest with an aggregate purchase price of $11,348,000 (average of $22.10 per share) were exercisable. During the fourth quarter of 1997, the Board of Trustees extended the exercise dates for 62,500 options previously granted to an officer of the Company and two retiring trustees. As a result, the Company recorded compensation expense of $300,000 for the four-month period ended December 31, 1997 relating to this change in terms. During fiscal year 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 encourages a fair value method of accounting for employee stock options and similar equity instruments. The statement also allows an entity to continue to account for stock-based compensation using the intrinsic value method in APB Opinion No. 25. As provided for in the statement, the Company elected to continue the intrinsic value method of expense recognition. If compensation cost for these plans had been determined using the fair value method prescribed by SFAS No. 123, the Company's net income and net income per share would have reflected the unaudited pro forma amounts indicated below:
Calendar Year Ended Calendar Year Ended 4-Month Period Ended Fiscal Year Ended 12/31/99 12/31/98 12/31/97 8/31/97 Net income: As reported $20,739,000 $23,185,000 $5,962,000 $10,235,000 Pro forma $20,435,000 $22,884,000 $5,861,000 $10,212,000 Net income per share: As reported- Basic $ 1.56 $ 1.74 $ .66 $ 1.18 Diluted $ 1.56 $ 1.74 $ .66 $ 1.18 Pro forma- Basic $ 1.53 $ 1.72 $ .65 $ 1.18 Diluted $ 1.53 $ 1.72 $ .65 $ 1.18
F-11 The pro forma effect on the results may not be representative of the impact in future years because the fair value method was not applied to options granted before 1996. There were no options granted in 1999. The fair value of each option was estimated on the grant date using the Black-Scholes option pricing model and the assumptions presented below:
Calendar Year Ended 4-Month Period Ended Fiscal Year Ended 12/31/98 12/31/97 8/31/97 Expected life in years 5 5 5 Risk-free interest rate 5.52% 6.09% 6.10% Volatility 17.76% 18.38% 17.31% Dividend yield 9.67% 7.65% 7.28%
The weighted average fair value of each option granted was $1.20, $2.34 and $2.05 for the calendar year ended December 31, 1998, the four-month period ended December 31, 1997 and the fiscal year ended August 31, 1997, respectively. Outstanding options as of December 31, 1999 have a weighted average remaining contractual life of 6.39 years, an average exercise price of $23.19 per share and an aggregate purchase price of $ 19,519,000. 10. Operating Leases The Company's apartments are typically leased to residents under operating leases for a period of one year. The Company's shopping centers are leased to tenants under operating leases with expiration dates extending to the year 2019. Future minimum rentals under noncancelable operating leases are as follows: Years Ended 12/31 2000 $ 23,236,000 2001 23,878,000 2002 22,991,000 2003 21,682,000 2004 19,869,000 Thereafter 130,272,000 ------------ $241,928,000 ============ The total future minimum rentals presented above do not include amounts that may be received as tenant reimbursements for charges to cover increases in certain operating costs. 11. Commitments and Contingencies During 1995, certain environmental matters arose at certain properties in which the Company has an interest. The Company retained environmental consultants in order to investigate these matters. At one property, in which the Company has a 50% ownership interest, groundwater contamination exists which the Company alleges was caused by the former tenant. Estimates to remediate this property, which are subject to the length of monitoring and the extent of remediation required, range in total from $50,000 to $100,000. In addition, above normal radon levels had been detected at three wholly-owned properties. Approximately $250,000 of costs were incurred to remediate two of the properties. The Company has recorded its share of these liabilities totaling $94,000 related to the consultants' evaluation of these matters which, in certain instances, are subject to applicable state approvals of the remediation plans. In management's opinion, no material incremental cost will be incurred on these properties. The Company will pursue recovery of remediation costs from all of the responsible parties, including its tenants and partners. The Company is also involved in a number of development and redevelopment projects which may require equity funding by the Company, or third-party debt or equity financing. In each case, the Company will evaluate the financing opportunities available to it at the time the project requires funding. In cases where the project is undertaken with a joint venture partner, the Company's flexibility in funding the project may be governed by the joint venture agreement or the covenants existing in its line of credit which limit the use of borrowed funds in joint venture projects. At December 31, 1999, the Company had approximately $73,000,000 committed to complete current development and redevelopment projects. Of this amount, approximately $40,000,000 of construction financing has been placed. In connection with certain development properties, including those development properties acquired as part of the TRO Transaction (see Note 3), the Company may be required to issue additional OP units upon the achievement of certain financial results. Further, the Company is obligated to acquire the remaining 11% interest in the Northeast Tower Center by the end of the first quarter of 2002. Finally, the Company is committed to issuing OP units valued at approximately $3,070,000 in connection with the acquisition of land on which the Christiana Power Center (Phase I) is substantially built. These units are expected to be issued at the completion of building and leasing the shopping center. F-12 12. Acquisitions During 1999, the Company acquired two shopping centers, three shopping center development sites, and an additional 10% interest in a shopping center in which it now owns a 60% interest. The Company paid approximately $51.4 million, consisting of $28.0 million in cash, $12.5 million in assumed debt, $9.9 million in new debt and $1.0 million through the issuance of OP units. Each of these acquisitions was accounted for by the purchase method of accounting. The results of operations for the acquired properties have been included from their respective purchase dates. The 1999 acquisitions did not result in a requirement to present pro forma information. From September 30, 1997 to December 31, 1998 the Company acquired wholly owned interests in eight properties and a 50% interest in two properties. The Company paid approximately $248.3 million, consisting of $126.0 million in cash, $93.5 million in assumed debt, and $28.8 million of operating partnership units. The Company also acquired the remaining 50% interests in two multifamily properties and a parcel of undeveloped land for cash of $0.8 million and assumption of liabilities of $33.6 million. Each of these acquisitions was accounted for by the purchase method of accounting. The unaudited pro forma information presented within this footnote is not necessarily indicative of the results which actually would have occurred if the acquisitions had been consummated on September 1, 1996, nor does the pro forma information purport to represent the results of operations for future periods.
Calendar Year Ended 4-Month Period Ended Fiscal Year Ended 12/31/98 12/31/97 8/31/97 Pro forma total revenues $76,846,000 $24,626,000 $70,819,000 Pro forma net income $23,664,000 $ 6,889,000 $ 9,790,000 Basic pro forma net income per share $ 1.78 $ .51 $ .74 Diluted pro forma net income per share $ 1.78 $ .50 $ .74
- -------------------------------------------------------------------------------- 13. Summary of Quarterly Results (unaudited) The following presents a summary of the unaudited quarterly financial information for the calendar year ended December 31, 1999 and 1998.
Calendar Year Ended 12/31/99 In thousands of dollars, except per share data 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Revenues(1) $21,739 $22,061 $22,242 $24,322 $90,364 ======= ======= ======= ======= ======= Income before gains on sales of interests in real estate(1) $ 4,524 $ 4,918 $ 4,902 $ 4,632 $18,976 Gains on sales of interests in real estate 1,346 -- 162 255 1,763 ------- ------- ------- ------- ------- Net income $ 5,870 $ 4,918 $ 5,064 $ 4,887 $20,739 ======= ======= ======= ======= ======= Basic net income per share: Income before gains on sales of interests in real estate $ .34 $ .37 $ .37 $ .35 $ 1.43 Gains on sales of interests in real estate .10 -- .01 .02 .13 ------- ------- ------- ------- ------- Total $ .44 $ .37 $ .38 $ .37 $ 1.56 ======= ======= ======= ======= ======= Diluted income per share: Income before gains on sales of interests in real estate $ .34 $ .37 $ .37 $ .35 $ 1.43 Gains on sales of interests in real estate .10 -- .01 .02 .13 ------- ------- ------- ------- ------- Total $ .44 $ .37 $ .38 $ .37 $ 1.56 ======= ======= ======= ======= =======
(1) 1st Quarter reclassified to conform with current year presentation.
Calendar Year Ended 12/31/98 In thousands of dollars, except per share data 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Revenues(1) $13,647 $13,916 $14,913 $19,269 $61,745 ======= ======= ======= ======= ======= Income before gains on sales of interests in real estate $ 4,593 $ 4,439 $ 5,739 $ 5,371 $20,142 Gains on sales of interests in real estate -- 1,766 1,277 -- 3,043 ------- ------- ------- ------- ------- Net income(2) $ 4,593 $ 6,205 $ 7,016 $ 5,371 $23,185 ======= ======= ======= ======= ======= Basic net income per share: Income before gains on sales of interests in real estate $ .35 $ .34 $ .43 $ .39 $ 1.51 Gains on sales of interests in real estate -- .13 .10 -- .23 ------- ------- ------- ------- ------- Total $ .35 $ .47 $ .53 $ .39 $ 1.74 ======= ======= ======= ======= ======= Diluted income per share: Income before gains on sales of interests in real estate $ .34 $ .34 $ .43 $ .39 $ 1.51 Gains on sales of interests in real estate -- .13 .10 -- .23 ------- ------- ------- ------- ------- Total $ .34 $ .47 $ .53 $ .39 $ 1.74 ======= ======= ======= ======= =======
(1) In May 1998, the Emerging Issues Task Force reached a consensus that a lessor should defer recognition of percentage rental income in interim periods until the specified target that triggers the contingent rental income is achieved. The Company recorded percentage rental income of $260,000, $402,000, $79,000 and $1,045,000 in the first, second, third and fourth quarters, respectively. (2) In the fourth quarter of 1998, the Company expensed $270,000 of prepayment fees relating to a mortgage which was refinanced. F-13 14. Segment Information In 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Statement established standards for reporting financial information about operating segments in interim and annual financial reports and provides for a "management approach" in identifying the reportable segments. The Company has four reportable segments: (1) retail properties, (2) multifamily properties, (3) other, and (4) corporate. The retail segment includes the operation and management of 22 regional and community shopping centers (12 wholly-owned and 10 owned in joint venture form). The multifamily segment includes the operation and management of 19 apartment communities (13 wholly-owned and 6 owned in joint venture form). The other segment includes the operation and management of 6 retail properties under development (4 wholly-owned and 2 owned in joint venture form) and 5 industrial properties (all wholly-owned). The corporate segment is responsible for cash and investment management and certain other general support functions. The accounting policies for the segments are the same as those described in Note 1, except that for segment reporting purposes, the Company uses the "proportionate-consolidation method" of accounting (a non-GAAP measure) for joint venture properties, instead of the equity method of accounting. The Company calculates the proportionate-consolidation method by applying their percentage ownership interest to the historical financial statements of their equity method investments.
Adjustments to Total Calendar Year Ended 12/31/99 Retail Multifamily Other Corporate Total Equity Method Consolidated ------ ----------- ----- --------- ----- -------------- ------------ Real estate operating revenues $64,870 $ 51,891 $ 1,534 $ -- $118,295 $ (29,075) $ 89,220 Real estate operating expenses 19,857 21,617 31 -- 41,505 (9,722) 31,783 -------- -------- ------- ------- -------- --------- -------- Net operating income 45,013 30,274 1,503 -- 76,790 (19,353) 57,437 -------- -------- ------- ------- -------- --------- -------- General and administrative expenses -- -- -- (3,560) (3,560) -- (3,560) Interest income -- -- -- 1,144 1,144 -- 1,144 PRI net operating income -- -- -- (2,504) (2,504) 2,504 -- -------- -------- ------- ------- -------- --------- -------- EBIDTA 45,013 30,274 1,503 (4,920) 71,870 (16,849) 55,021 -------- -------- ------- ------- -------- --------- -------- Interest expense (17,261) (12,534) (263) (1,107) (31,165) 9,323 (21,842) Depreciation and amortization (10,615) (7,712) (98) (1,238) (19,663) 5,440 (14,223) PRI income taxes -- -- -- 56 56 (56) -- Gains on sales of interests in real estate 445 -- 1,318 -- 1,763 -- 1,763 Minority interest in operating partnership -- -- -- (2,122) (2,122) -- (2,122) Equity in interest of partnerships and joint ventures -- -- -- -- -- 6,178 6,178 Equity in loss of PRI -- -- -- -- -- (4,036) (4,036) -------- -------- ------- ------- -------- --------- -------- Net income $ 17,582 $ 10,028 $ 2,460 $(9,331) $ 20,739 $ -- $ 20,739 ======== ======== ======= ======= ======== ========= ======== Investments in real estate, at cost $402,154 $265,165 $75,819 $ -- $743,138 $(165,617) $577,521 ======== ======== ======= ======= ======== ========= ======== Total assets $384,417 $208,020 $72,796 $15,812 $681,045 $(133,455) $547,590 ======== ======== ======= ======= ======== ========= ======== Capital expenditures $ 293 $ 3,332 $ -- $ -- $ 3,625 $ (432) $ 3,193 ======== ======== ======= ======= ======== ========= ========
Adjustments to Total Calendar Year Ended 12/31/98 Retail Multifamily Other Corporate Total Equity Method Consolidated ------ ----------- ----- --------- ----- -------------- ------------ Real estate operating revenues $ 42,272 $ 46,167 $ 1,619 $ -- $ 90,058 $ (28,313) $ 61,745 Real estate operating expenses 13,030 19,545 35 -- 32,610 (10,091) 22,519 -------- -------- ------- ------- -------- --------- -------- Net operating income 29,242 26,622 1,584 -- 57,448 (18,222) 39,226 -------- -------- ------- ------- -------- --------- -------- General and administrative expenses -- -- -- (3,351) (3,351) -- (3,351) Interest income -- -- -- 650 650 -- 650 PRI net operating income -- -- -- 762 762 (762) -- -------- -------- ------- ------- -------- --------- -------- EBIDTA 29,242 26,622 1,584 (1,939) 55,509 (18,984) 36,525 -------- -------- ------- ------- -------- --------- -------- Interest expense (11,067) (7,050) (341) (973) (19,431) 8,840 (10,591) Depreciation and amortization (6,182) (6,869) (117) (1,198) (14,366) 4,960 (9,406) PRI income taxes -- -- -- 123 123 (123) -- Gains on sales of interests in real estate 1,277 1,766 -- -- 3,043 -- 3,043 Minority interest in operating partnership -- -- -- (1,423) (1,423) -- (1,423) Equity in interest of partnerships and joint ventures -- -- -- -- -- 5,985 5,985 Equity in loss of PRI -- -- -- -- -- (678) (678) Loss on early extinguishment of debt -- (270) -- -- (270) -- (270) -------- -------- ------- ------- -------- --------- -------- Net income $ 13,270 $ 14,199 $ 1,126 $ (5,410) $ 23,185 $ -- $ 23,185 ======== ======== ======= ======= ======== ========= ======== Investments in real estate, at cost $356,243 $258,195 $33,712 $ -- $648,150 $(138,744) $509,406 ======== ======== ======= ======= ======== ========= ======== Total assets $269,829 $137,125 $ 9,410 $179,517 $595,881 $(114,266) $481,615 ======== ======== ======= ======= ======== ========= ======== Capital expenditures $ 831 $ 3,777 $ -- $ -- $ 4,608 $ (974) $ 3,634 ======== ======== ======= ======= ======== ========= ========
F-14
Adjustments to Total 4-Month Period Ended 12/31/97 Retail Multifamily Other Corporate Total Equity Method Consolidated ------ ----------- ----- --------- ----- -------------- ------------ Real estate operating revenues $ 11,076 $ 14,902 $ 538 $ -- $ 26,516 $ (9,346) $ 17,170 Real estate operating expenses 3,714 6,654 7 -- 10,375 (3,460) 6,915 -------- -------- ------- ------- -------- --------- -------- Net operating income 7,362 8,248 531 -- 16,141 (5,886) 10,255 -------- -------- ------- ------- -------- --------- -------- General and administrative expenses -- -- -- (1,088) (1,088) -- (1,088) Interest income -- -- -- 82 82 -- 82 PRI net operating income -- -- -- 922 922 (922) -- -------- -------- ------- ------- -------- --------- -------- EBIDTA 7,362 8,248 531 (84) 16,057 (6,808) 9,249 -------- -------- ------- ------- -------- --------- -------- Interest expense (2,290) (4,534) (57) (195) (7,076) 2,727 (4,349) Depreciation and amortization (1,588) (2,126) (39) (434) (4,187) 1,492 (2,695) PRI income taxes -- -- -- (228) (228) 228 -- Gains on sales of interests in real estate 2,090 -- -- -- 2,090 -- 2,090 Minority interest in operating partnership -- -- -- (394) (394) -- (394) Equity in interest of partnerships and joint ventures -- -- -- -- -- 2,101 2,101 Equity in income of PRI -- -- -- -- -- 260 260 Loss on early extinguishment of debt -- -- -- (300) (300) -- (300) -------- -------- ------- ------- -------- --------- -------- Net income $ 5,574 $ 1,588 $ 435 $ (1,635) $ 5,962 $ -- $ 5,962 ======== ======== ======= ======= ======== ========= ======== Investments in real estate, at cost $190,928 $214,587 $20,093 -- $425,608 $(137,681) $287,927 ======== ======== ======= ======= ======== ========= ======== Total assets $104,099 $107,474 $ 5,344 $161,461 $378,378 $(112,812) $265,566 ======== ======== ======= ======= ======== ========= ======== Capital expenditures $ 114 $ 1,405 $ -- $ -- $ 1,519 $ (308) $ 1,211 ======== ======== ======= ======= ======== ========= ========
Adjustments to Total Fiscal Year Ended 8/31/97 Retail Multifamily Other Corporate Total Equity Method Consolidated ------ ----------- ----- --------- ----- -------------- ------------ Real estate operating revenues $ 20,186 $ 44,158 $ 1,426 $ -- $ 65,770 $ (25,539) $ 40,231 Real estate operating expenses 6,911 19,686 32 -- 26,629 (10,142) 16,487 -------- -------- ------- ------- -------- --------- -------- Net operating income 13,275 24,472 1,394 -- 39,141 (15,397) 23,744 -------- -------- ------- ------- -------- --------- -------- General and administrative expenses -- -- -- (3,324) (3,324) -- (3,324) Provision for losses on investments -- -- -- (500) (500) -- (500) Interest income -- -- -- 254 254 -- 254 -------- -------- ------- ------- -------- --------- -------- EBIDTA 13,275 24,472 1,394 (3,570) 35,571 (15,397) 20,174 -------- -------- ------- ------- -------- --------- -------- Interest expense (4,446) (12,161) (159) -- (16,766) 7,680 (9,086) Depreciation and amortization (3,151) (6,264) (118) (106) (9,639) 3,380 (6,259) Gains on sales of interests in real estate 1,069 -- -- -- 1,069 -- 1,069 Equity in interest of partnerships and joint ventures -- -- -- -- -- 4,337 4,337 -------- -------- ------- ------- -------- --------- -------- Net income $ 6,747 $ 6,047 $ 1,117 $(3,676) $ 10,235 $ -- $ 10,235 ======== ======== ======= ======= ======== ========= ======== Investments in real estate, at cost $ 94,185 $212,521 $ 9,486 $ -- $316,192 $(113,749) $202,443 ======== ======== ======= ======= ======== ========= ======== Total assets $ 52,781 $150,833 $ 5,091 $43,598 $252,303 $ (86,646) $165,657 ======== ======== ======= ======= ======== ========= ======== Capital expenditures $ 794 $ 3,258 $ -- $ -- $ 4,052 $ (1,330) $ 2,722 ======== ======== ======= ======= ======== ========= ========
- -------------------------------------------------------------------------------- 15. Subsequent Events In 2000, the Company and an unrelated third-party formed a partnership and purchased the Willow Grove Park shopping center in Willow Grove, Pennsylvania for approximately $140 million. Upon completion of certain investment requirements, including the funding of an expansion of the shopping center, the Company's current 0.01% interest in the partnership that owns the shopping center will increase to a subordinated 50% interest. In 2000, the Company purchased, for $11 million, including the assumption of debt, its partner's 35% interest in the Emerald Point Multifamily Community. The property is now 100% owned and operated by the Company. F-15 SCHEDULE II PENNSYLVANIA REAL ESTATE INVESTMENT TRUST VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E Additions ---------------------------------- Balance Beginning Charged to Costs Charged to Other Balance at End Description of Period and Expenses Accounts Deductions of Period ----------- --------- ------------ -------- ---------- --------- ALLOWANCE FOR POSSIBLE LOSSES: Calendar year ended December 31, 1999 $ 1,572,000 $ -- $ 135,000 $ 1,179,000 $ 528,000 ============ ============ ============ ============ ============ Calendar year ended December 31, 1998 $ 1,770,000 $ -- $ -- $ 198,000 $ 1,572,000 ============ ============ ============ ============ ============ Four-month period ended December 31, 1997 $ 1,831,000 $ -- $ -- $ 61,000 $ 1,770,000 ============ ============ ============ ============ ============ Fiscal year ended August 31, 1997 $ 2,042,000 $ 500,000 $ -- $ 711,000 $ 1,831,000 ============ ============ ============ ============ ============
F-16
SCHEDULE III PREIT Investment in Real Estate and As of December 31, 1999 Initial Cost of Balance of Initial Cost of Improvements Balance of Building & Current Cost of Building & net of Land Improvements Depreciation Land Improvemnt Retirements @ 12/31/99 @ 12/31/99 Balance ---------------------------------------------------------------------------------------- MULTIFAMILY PROPERTIES: 2031 Locust St $ 100,000 $ 1,028,000 $ 2,418,000 $ 100,000 $ 3,446,000 $ 2,591,000 Boca Palms 7,107,000 28,444,000 1,831,000 7,107,000 30,275,000 5,227,000 Camp Hill 336,000 3,060,000 1,919,000 336,000 4,979,000 3,874,000 Cobblestone Apartments 2,791,000 9,697,000 2,560,000 2,791,000 12,257,000 2,645,000 Eagles Nest 4,021,000 17,615,000 1,442,000 4,021,000 19,057,000 4,277,000 Emerald Point 3,062,000 18,645,000 3,706,000 3,062,000 22,351,000 4,963,000 Fox Run - Bear 1,355,000 19,959,000 1,811,000 1,355,000 21,770,000 5,764,000 Hidden Lakes 1,225,000 11,793,000 1,031,000 1,225,000 12,824,000 2,402,000 Kenwood Gardens 489,000 3,235,000 3,287,000 489,000 6,522,000 5,330,000 Lakewood Hills 501,000 11,402,000 5,002,000 501,000 16,404,000 10,069,000 Palms of Pembroke 4,869,000 17,384,000 1,367,000 4,869,000 18,751,000 3,045,000 Shenandoah Village 2,200,000 8,975,000 1,580,000 2,200,000 10,555,000 2,016,000 The Marylander 117,000 4,340,000 2,836,000 117,000 7,176,000 6,290,000 The Woods 4,234,000 17,268,000 818,000 4,234,000 18,086,000 652,000 INDUSTRIAL PROPERTIES: ARA- Allentown 3,000 82,000 - 3,000 82,000 76,000 ARA - Pennsauken 20,000 190,000 - 20,000 190,000 160,000 Interstate Commerce 34,000 364,000 1,404,000 34,000 1,768,000 1,302,000 People's Drug Company 225,000 1,873,000 476,000 225,000 2,349,000 1,580,000 Sears 25,000 206,000 176,000 25,000 382,000 333,000 RETAIL PROPERTIES: Christiana Power Center 9,316,000 22,154,000 - 9,316,000 22,154,000 1,023,000 Crest Plaza 332,000 2,349,000 3,393,000 282,000 5,792,000 3,956,000 Festival Shopping Center 3,728,000 14,988,000 - 3,728,000 14,988,000 503,000 Florence Commons 959,000 5,603,000 - 959,000 5,603,000 70,000 Forestville, SC 440,000 5,572,000 705,000 440,000 6,277,000 3,208,000 Magnolia Mall 9,279,000 37,359,000 2,175,000 9,279,000 39,534,000 2,294,000 Mandarin Corner 4,891,000 10,168,000 604,000 4,891,000 10,772,000 4,109,000 North Dartmouth Mall 7,199,000 28,945,000 1,895,000 7,199,000 30,840,000 1,784,000 Home Depot Operations 2,716,000 10,863,000 - 2,716,000 10,863,000 204,000 Northeast Tower Center 4,205,000 16,824,000 810,000 4,606,000 17,233,000 442,000 Prince George's Plaza 13,066,000 57,479,000 1,001,000 13,066,000 58,480,000 1,960,000 South Blanding Village 2,946,000 6,138,000 346,000 2,946,000 6,484,000 2,325,000 Valleyview 4,412,000 3,613,000 - 4,412,000 3,613,000 103,000 DEVELOPMENT PROPERTIES: Christiana - Dev (Phase II) - 244,000 - - 244,000 - Northeast Tower Development 3,650,000 551,000 - 3,650,000 551,000 - Paxton - Development 16,308,000 12,959,000 - 16,308,000 12,959,000 - Warrington - Development 1,380,000 4,018,000 - 1,380,000 4,018,000 - ---------------------------------------------------------------------------------------------- TOTAL INVESTMENT IN REAL ESTATE $117,541,000 $415,387,000 $44,593,000 $117,892,000 $459,629,000 $84,577,000 ==============================================================================================
[RESTUBBED TABLE]
Date Current of Depreciable Encumbrance Construction/ Life in Balance Acquisition Years ------------------------------------------------ MULTIFAMILY PROPERTIES: 2031 Locust St $ 5,915,000 1961 25 Boca Palms 22,469,000 1994 39 Camp Hill 6,437,000 1969 33 Cobblestone Apartments 13,769,000 1992 40 Eagles Nest 15,202,000 1998 39 Emerald Point 16,223,000 1993 39 Fox Run - Bear 14,381,000 1998 39 Hidden Lakes 10,638,000 1994 39 Kenwood Gardens 7,208,000 1963 38 Lakewood Hills 18,641,000 1972-80 45 Palms of Pembroke 16,503,000 1994 39 Shenandoah Village 8,290,000 1993 39 The Marylander 12,228,000 1962 39 The Woods 7,066,000 1998 39 INDUSTRIAL PROPERTIES: ARA- Allentown - 1962 40 ARA - Pennsauken - 1962 50 Interstate Commerce - 1963 50 People's Drug Company - 1962 55 Sears - 1963 50 RETAIL PROPERTIES: Christiana Power Center - 1998 39 Crest Plaza - 1964 40 Festival Shopping Center - 1998 39 Florence Commons - 1999 39 Forestville, SC - 1983 33.3 Magnolia Mall 23,837,000 1998 39 Mandarin Corner 7,812,000 1988 39 North Dartmouth Mall - 1998 39 Home Depot Operations 12,500,000 1999 39 Northeast Tower Center - 1998 39 Prince George's Plaza 47,711,000 1998 39 South Blanding Village - 1988 40 Valleyview - 1998 39 DEVELOPMENT PROPERTIES: Christiana - Dev (Phase II) - 1998 Northeast Tower Development - 1998 Paxton - Development 6,804,000 1998 Warrington - Development - 1998 ------------- TOTAL INVESTMENT IN REAL ESTATE $273,634,000 =============
F-17 Summary of Real Estate Investments and Accumulated Depreciation The aggregate cost for Federal income tax purposes of the Company's investment in real estate was approximately $574 million and $505 million at December 31, 1999 and 1998, respectively. The changes in total real estate and accumulated depreciation for the three years ended December 31, are as follows:
Total Real Estate Assets ----------------------------------------------------------------------------------------- Calendar Year Ended Calendar Year Ended 4 Month Period Ended Fiscal Year Ended December 31, 1999 December 31, 1998 December 31, 1997 August 31, 1997 ----------------- ----------------- ----------------- --------------- BALANCE, beginning of period $509,406,000 $287,926,000 $202,443,000 $198,542,000 Acquisitions and development 55,830,000 217,383,000 84,464,000 2,331,000 Improvements 12,285,000 4,097,000 1,020,000 1,570,000 ------------ ------------ ------------ ------------ BALANCE, end of period $577,521,000 $509,406,000 $287,926,000 $202,443,000 ============ ============ ============ ============ Accumulated Depreciation ----------------------------------------------------------------------------------------- Calendar Year Ended Calendar Year Ended 4 Month Period Ended Fiscal Year Ended December 31, 1999 December 31, 1999 December 31, 1997 August 31, 1997 ----------------- ----------------- ----------------- --------------- BALANCE, beginning of period $71,129,000 $53,171,000 $50,711,000 $44,693,000 Depreciation expense 13,448,000 8,902,000 2,460,000 5,884,000 Transfers from partnerships and joint ventures -- 9,056,000 -- 134,000 ----------- ----------- ----------- ----------- BALANCE, end of period $84,577,000 $71,129,000 $53,171,000 $50,711,000 =========== =========== =========== ===========
F-18 EXHIBIT INDEX Exhibit No. Description ----------- ----------- 21 Listing of subsidiaries 23 Consent of Arthur Andersen LLP (Independent Public Accountants) 27 Financial Data Schedule EX-21 2 EXHIBIT 21 Exhibit 21 PREIT's Subsidiaries We conduct substantially all of our real estate ownership activities through PREIT Associates, L.P., a Delaware limited partnership, of which we are the sole general partner and 90.7% owner. PREIT Associates and/or its affiliates own an interest in the following partnerships:
Aggregate Names of Partnership State of Organization Percentage Owned* - -------------------- --------------------- ---------------- Bailey Associates PA 50% Cambridge Apartments PA 50 Countrywood Apartments Limited Partnership FL 50 Eagles Nest Associates FL 100 Forestville Plaza Shopping Center Limited Partnership MD 100 Fox Run Apartments PA 50 Fox Run Del Associates DE 100 GP Stones Limited Partnership FL 100 Mall Corners Ltd. GA 19 Mall Corner II, Ltd. GA 11 Jacksonville Associates FL 100 Laurel Mall Associates PA 40 Lehigh Valley Associates PA 50 MC Associates FL 100 New Regency Hilltop Associates VA 65 Oxford Valley Road Associates PA 50 Palmer Park Mall Venture PA 50 PR Shenandoah Limited Partnership FL 100 PR 8000 Airport Highway, L.P. PA 100 PR 8000 National Highway, L.P. PA 100 Regency Associates NE 50 Rio Grande Venture PA 60 ALRO Associates, L.P. DE 50 PR Fox Run, L.P. PA 100 PR Laurel Mall, L.P. PA 100 PR Palmer Park, L.P. PA 100 PR Rio Mall Limited Partnership PA 100 PR Springfield Associates, L.P. PA 100 PR Warrington, L.P. PA 100 PR Will-O-Hill, L.P. PA 100 Will-O-Hill Apartments PA 50 PRGL Paxton Limited Partnership PA 100 PRDB Springfield Limited Partnership PA 50 The Woods Associates PA 100 PR Festival Limited Partnership PA 100 Roosevelt II Associates, L.P. PA 89-Capital Interest 99-Profits Interest PR Northeast Limited Partnership PA 100 Roosevelt Associates, L.P. PA 89-Capital Interest 99-Profits Interest PR Titus Limited Partnership PA 100 PR Eagles Nest L.P. DE 100 Red Rose Commons Associates, L.P. PA 50 PR Palmer Park, L.P. PA 100 Tupelo Mall AL 50(1) VLRC Associates GA 87.5(1)
* By PREIT Associates, we own approximately 90.7% of PREIT Associates. (1) By us, not PREIT Associates. We own 100% of the shares of the following corporations:
Names of Subsidiaries State of Organization - --------------------- --------------------- Berdel, Inc. DE Berfla, Inc. FL Burren, Inc. FL PR West Palm Inc. FL PR VA Regency Inc. VA PR Forestville Inc. MD PREIT Associates is the sole beneficiary of the following business trusts: Name of Trust State of Organization - ------------- --------------------- PR Fox Run Trust PA PR Laurel Mall Trust PA PR Metroplex Trust PA PR Northeast Trust PA PR Oxford Valley Trust PA PR Palmer Park Trust PA PR Red Rose Trust PA PR Springfield Trust PA PR Warrington Trust PA PR Will-O-Hill Trust PA Trust #7000 IL
PREIT Associates has a member interest in the following limited liability companies:
State of Organization Percentage Owned --------------------- ----------------- Subsidiary LLC PR Christiana LLC DE 100 PR Cobblestone LLC DE 100 PR Concord LLC DE 100 PR Countrywood LLC DE 100 PR Forestville LLC DE 100 PR Interstate Container LLC DE 100 PR Magnolia LLC DE 100 PR Mandarin Conners LLC DE 100 PR North Dartmouth Mall LLC DE 100 PR Regency Associates LLC DE 100 PR Rio Mall LLC DE 100 PR South Blanding LLC DE 100 PR 8000 Airport Highway LLC DE 100 PR 8000 National Highway LLC DE 100 PR Paxton LLC PA 100 PRDB Springfield LLC PA 50 PR Woods LLC PA 100 PR Festival LLC PA 100 PR Northeast LLC PA 100 PR Warrington LLC PA 100 PR Titus LLC PA 100 PR Berfla LLC DE 100 PR PGPlaza LLC DE 100 PR Fox Run Del LLC DE 100 PR Berdel LLC DE 100 PR Foulk Plaza LLC DE 100 PR Will-O-Hill LLC PA 100 CD Development LLC DE 100 PR Prince George's Plaza LLC DE 100 PR Pembroke LLC DE 100 PR Pembroke Manager LLC DE 100 PR Red Rose LLC PA 100 PR Metroplex East LLC PA 100 PR Metroplex West LLC PA 100 PR Kenwood Gardens LLC DE 100 PR Kenwood Gardens Manager LLC DE 100 PR Marylander LLC DE 100 PR Marylander Manager LLC DE 100 PR Hidden Lakes LLC DE 100 PR Hidden Lakes Manager LLC DE 100 PR Boca Palms LLC DE 100 PR Boca Palms Manager LLC DE 100 PR Florence LLC SC 100
PREIT Associates owns all of the non-voting shares of PREIT-RUBIN, Inc., a Pennsylvania corporation, representing 95% of PREIT-RUBIN's equity. PREIT-RUBIN owns all of the shares of The Rubin Organization-Illinois, Inc., an Illinois corporation. EX-23 3 EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated March 1, 2000, included in this Form 10-K, into the Company's previously filed registration statements on Forms S-3 (File No. 33-61115, File No. 333-48917, File No. 333-70157, as amended, File No. 333-74693, File No. 333-74695 and File No. 333-74697) and Forms S-8 (File No. 33-59771, File No. 33-59773, File No. 33-59767 and File No. 333-69877). /s/ Arthur Andersen LLP Philadelphia, Pennsylvania March 27, 2000 EX-27 4 FINANCIAL DATA SCHEDULE
5 0000077281 PENNSYLVANIA REAL ESTATE INVESTMENT TRUST U.S. 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1 3,235,000 0 51,939,000 528,000 0 0 577,521,000 84,577,000 547,590,000 49,544,000 364,634,000 0 0 13,338,000 120,074,000 547,590,000 89,220,000 92,127,000 49,566,000 0 0 0 21,842,000 20,739,000 0 20,739,000 0 0 0 20,739,000 1.56 1.56
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